-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LNGyzTGj89lUfumOvu66gX92Ojr0h+Zbv4iPnFR5h9tYfAcZLtmpKafdnEJTTWLg zYzWoK5v4iiouIxCtuFteQ== 0001036050-99-000403.txt : 19990304 0001036050-99-000403.hdr.sgml : 19990304 ACCESSION NUMBER: 0001036050-99-000403 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PP&L RESOURCES INC CENTRAL INDEX KEY: 0000922224 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 232758192 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11459 FILM NUMBER: 99556450 BUSINESS ADDRESS: STREET 1: TWO N NINTH ST CITY: ALLENTOWN STATE: PA ZIP: 18101 BUSINESS PHONE: 6107745151 MAIL ADDRESS: STREET 1: TWO NORTH NINTH ST STREET 2: TWO NORTH NINTH STREET CITY: ALLENTOWN STATE: PA ZIP: 181011179 10-K405 1 FORM 10-K405 FOR PP&L RESOURCE, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________ to ___________ Commission File Registrant; State of Incorporation; IRS Employer Number Address and Telephone Number Identification No. - --------------- ----------------------------------- ------------------ 1-11459 PP&L Resources, Inc. 23-2758192 (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101 (610) 774-5151 1-905 PP&L, Inc. 23-0959590 (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101 (610) 774-5151 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ------------------- ------------------------ Common Stock of PP&L Resources, Inc. New York & Philadelphia Stock Exchanges Preferred Stock of PP&L, Inc. 4-1/2% New York & Philadelphia Stock Exchanges 3.35% Series Philadelphia Stock Exchange 4.40% Series New York & Philadelphia Stock Exchanges 4.60% Series Philadelphia Stock Exchange Company-Obligated Mandatorily Redeemable Securities of PP&L, Inc. 8.20% Series ($25 stated value)(a) New York Stock Exchange 8.10% Series ($25 stated value)(b) New York Stock Exchange (a) Issued by PP&L Capital Trust and guaranteed by PP&L, Inc. (b) Issued by PP&L Capital Trust II and guaranteed by PP&L, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. PP&L Resources, Inc. [ ] PP&L, Inc. [ X ] Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. PP&L Resources, Inc. Yes X No ----- ----- PP&L, Inc. Yes X No ----- ----- The aggregate market value of the voting common stock held by non-affiliates of PP&L Resources, Inc. at January 31, 1999 was $4,208,205,601. PP&L Resources, Inc. held all 157,300,382 outstanding common shares, no par value, of PP&L, Inc. The aggregate market value of the voting preferred stock held by non-affiliates of PP&L, Inc. at January 31, 1999 was $92,518,336. The number of shares of PP&L Resources, Inc. Common Stock, $.01 par value, outstanding on January 31, 1999 was 157,684,519, excluding 16,996,129 shares held as treasury stock. Documents incorporated by reference: Registrants have incorporated herein by reference certain sections of their 1999 Notices of Annual Meetings and Proxy Statements which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1998. Such Proxy Statements will provide the information required by Part III of this Report. PP&L RESOURCES, INC. PP&L, INC. FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1998 ------------------------------------ TABLE OF CONTENTS ----------------- This combined Form 10-K is separately filed by PP&L Resources, Inc. and PP&L, Inc. Information contained herein relating to PP&L, Inc. is filed by PP&L Resources, Inc. and separately by PP&L, Inc. on its own behalf. PP&L, Inc. makes no representation as to information relating to PP&L Resources, Inc. or its subsidiaries, except as it may relate to PP&L, Inc. Item Page - ---- ---- PART I ------ 1. Business ............................................. 2. Properties ........................................... 3. Legal Proceedings .................................... 4. Submission of Matters to a Vote of Security Holders .. Executive Officers of the Registrants ................ PART II ------- 5. Market for the Registrant's Common Equity and Related Stockholder Matters .................................. 6. Selected Financial Data .............................. 7. Review of the Financial Condition and Results of Operations ............................... 8. Financial Statements and Supplementary Data Report of Independent Accountants .................. Management's Report on Responsibility for Financial Statements ....................................... Financial Statements: PP&L Resources, Inc. Consolidated Statement of Income for each of the Three Years Ended December 31, 1998, 1997 and 1996.............................................. Consolidated Statement of Cash Flows for each of the Three Years Ended December 31, 1998, 1997 and 1996.......................................... Consolidated Balance Sheet at December 31, 1998 and 1997 ............................................. Consolidated Statement of Shareowners' Common Equity for each of the Three Years Ended December 31, 1998, 1997 and 1996........................... Consolidated Statement of Preferred Stock at December 31, 1998 and 1997 ....................... Consolidated Statement of Company-Obligated Mandatorily Redeemable Securities at December 31, 1998 and 1997 ....................... Consolidated Statement of Long-Term Debt at December 31, 1998 and 1997 ....................... PP&L, Inc. Consolidated Statement of Income for each of the Three Years Ended December 31, 1998, 1997 and 1996.............................................. Consolidated Statement of Cash Flows for each of the Three Years Ended December 31, 1998, 1997 and 1996.......................................... Consolidated Balance Sheet at December 31, 1998 and 1997 ............................................. Consolidated Statement of Shareowner's Common Equity for each of the Three Years Ended December 31, 1998, 1997 and 1996 .......................... Consolidated Statement of Preferred Stock at December 31, 1998 and 1997 ....................... Notes to Financial Statements ...................... Supplemental Financial Statement Schedule: II - Valuation and Qualifying Accounts and Reserves for the Three Years Ended December 31, 1998 ............................. Quarterly Financial, Common Stock Price and Dividend Data ...................................... 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................ PART III -------- 10. Directors and Executive Officers of the Registrants .. 11. Executive Compensation ............................... 12. Security Ownership of Certain Beneficial Owners and Management ................................ 13. Certain Relationships and Related Transactions ....... PART IV ------- 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................ Shareowner and Investor Information .................. Signatures ........................................... Exhibit Index ........................................ Computation of Ratio of Earnings to Fixed Charges .... Glossary of Terms and Abbreviations AFUDC (Allowance for Funds Used During Construction) - the cost of equity and debt funds used to finance construction projects that is capitalized as part of construction cost. ATLANTIC - Atlantic City Electric Company BG&E - Baltimore Gas & Electric Company CERCLA - Comprehensive Environmental Response, Compen-sation and Liability Act CLEAN AIR ACT (Federal Clean Air Act Amendments of 1990) - legislation enacted to address environmental issues including acid rain, ozone and toxic air emissions. CTC - competitive transition charge CUSTOMER CHOICE ACT - (Pennsylvania Electricity Generation Customer Choice and Competition Act) - legislation enacted to restructure the state's electric utility industry to create retail access to a competitive market for generation of electricity DelSur - Distributidora Electricidad del Sur S.A., an electric distribution company in El Salvador DEP - Pennsylvania Department of Environmental Protection DISTRICT COURT - United States District Court for the Eastern District of Pennsylvania. DOE - Department of Energy DRIP (Dividend Reinvestment Plan) - program available to shareowners of PP&L Resources' common stock and PP&L preferred stock to reinvest dividends in PP&L Resources' common stock instead of receiving dividend checks. EGS - electric generation supplier EITF - Emerging Issues Task Force, an organization that aids the FASB in identifying emerging issues that may require FASB action. EMEL - Empresas Emel, S.A., a Chilean electric distribution holding company EMF - electric and magnetic fields ENERGY ACT (Energy Policy Act of 1992) - legislation passed by Congress to promote competition in the electric energy market for bulk power. ENERGY MARKETING CENTER - organization within PP&L responsible for marketing and trading wholesale energy EPA - Environmental Protection Agency ESOP - Employee Stock Ownership Plan FASB (Financial Accounting Standards Board) - a rulemaking organization that establishes financial accounting and reporting standards. FGD - flue gas desulfurization equipment installed at coal-fired power plants to reduce sulfur dioxide emissions. FERC (Federal Energy Regulatory Commission) - federal agency that regulates interstate transmission and sale of electricity and related matters. GRT - Gross Receipts Tax H.T. LYONS - H.T. Lyons, Inc., a PP&L Resources unregulated subsidiary specializing in mechanical contracting and engineering. IBEW - International Brotherhood of Electrical Workers ISO - Independent System Operator ITC - intangible transition charge JCP&L - Jersey Central Power & Light Company MAJOR UTILITIES - Atlantic, BG&E and JCP&L McCarl's - McCarl's Inc., a PP&L Resources unregulated subsidiary specializing in mechanical contracting and engineering. MCCLURE - McClure Company, a PP&L Resources unregulated subsidiary specializing in mechanical contracting and engineering. MSHA - Mine Safety and Health Administration NOX - nitrogen oxide NPDES - National Pollutant Discharge Elimination System NRC (Nuclear Regulatory Commission) - federal agency that regulates operation of nuclear power facilities NUG (Non-Utility Generator) - generating plants not owned by regulated utilities. If the NUG meets certain criteria, its electrical output must be purchased by public utilities as required by PURPA. OCA - Pennsylvania Office of Consumer Advocate OSM - United States Office of Surface Mining PA. CNI - Pennsylvania corporate net income tax PCB (Polychlorinated Biphenyl) - additive to oil used in certain electrical equipment up to the late-1970s. Now classified as a hazardous chemical. PECO - PECO Energy Company PENN FUEL GAS - Penn Fuel Gas, Inc., a PP&L Resources regulated subsidiary specializing in natural gas distribution, transmission and storage services, and the sale of propane. PJM (PJM Interconnection, L.L.C.) - operates the electric transmission network and electric energy market in the mid-Atlantic region of the U.S. PLAN - PP&L's non-contributory defined benefit pension plan. PP&L - PP&L, Inc. PP&L CAPITAL FUNDING - PP&L Capital Funding, Inc., PP&L Resources' financing subsidiary. PP&L CAPITAL TRUST - a Delaware statutory business trust created to issue Preferred Securities, whose common stock is held by PP&L. PP&L CAPITAL TRUST II -- a Delaware statutory business trust created to issue Preferred Securities, whose common stock is held by PP&L. PP&L ENERGYPLUS - Refers to PP&L, Inc. d/b/a PP&L EnergyPlus, and PP&L EnergyPlus Co., a PP&L, Inc. unregulated subsidiary which is involved in retail electric generating supply. During 1998, PP&L, Inc. d/b/a PP&L EnergyPlus provided retail electric generating supply in the Pennsylvania retail pilot program. As a result of the PUC restructuring settlement, PP&L EnergyPlus became a separate subsidiary of PP&L, Inc. in September 1998. As of January 1999, PP&L EnergyPlus Co. is providing retail electric generating supply to customers throughout Pennsylvania. PP&L GLOBAL - PP&L Global, Inc., a PP&L Resources unregulated subsidiary which invests in and develops world-wide power projects PP&L RESOURCES - PP&L Resources, Inc., the parent holding company of PP&L, PP&L Global and other subsidiaries. PP&L SPECTRUM - PP&L Spectrum, Inc., a PP&L Resources unregulated subsidiary which offers energy-related products and services. PP&L'S MORTGAGE - PP&L's Mortgage and Deed of Trust, dated October 1, 1945. PREFERRED SECURITIES - Company-obligated mandatorily re-deemable preferred securities of subsidiary trusts holding solely company debentures (issued by two Delaware statutory business trusts). PUC (Pennsylvania Public Utility Commission) - state agency that regulates certain ratemaking, services, accounting, and operations of Pennsylvania utilities. PUC DECISION - final order issued by the PUC on September 27, 1995 pertaining to PP&L's base rate case filed in December 1994. PUC FINAL ORDER - Final order issued by the PUC on August 27, 1998, approving the settlement of PP&L Inc.'s restructuring proceeding. PUHCA - Public Utility Holding Company Act of 1935 PURPA (Public Utility Regulatory Policies Act of 1978) - legislation passed by Congress to encourage energy conservation, efficient use of resources, and equitable rates. RCRA - 1976 Resource Conservation and Recovery Act SBRCA - Special Base Rate Credit Adjustment SEC - Securities and Exchange Commission SER - Schuylkill Energy Resources, Inc. SFAS (Statement of Financial Accounting Standards) - accounting and financial reporting rules issued by the FASB. SO2 - Sulfur dioxide STAS (State Tax Adjustment Surcharge) - rate adjustment mechanism to customer bills for changes in certain state taxes. SUPERFUND - federal and state legislation that addresses remediation of contaminated sites. SWEB - South Western Electricity plc, a British regional electric utility company. U.K. - United Kingdom VEBA (Voluntary Employee Benefit Association Trust) - trust accounts for health and welfare plans for future payments to employees, retirees or their beneficiaries. VERP - Voluntary Early Retirement Program YEAR 2000 - a set of date-related problems that may be experienced by software systems or applications. PART I ------ ITEM 1. BUSINESS ---------------- Terms and abbreviations appearing in "BUSINESS" are explained in the glossary. BACKGROUND PP&L Resources is a holding company with headquarters in Allentown, PA. Its subsidiaries include PP&L, which provides electricity delivery service in eastern and central Pennsylvania, sells retail electricity throughout Pennsylvania and markets wholesale electricity in 28 states and Canada; PP&L EnergyPlus (a subsidiary of PP&L), which sells competitively-priced energy and energy services to newly deregulated markets; PP&L Global, an international independent power company which invests in and develops world-wide power projects; PP&L Spectrum, which markets energy-related services and products; PP&L Capital Funding, which provides debt funding for PP&L Resources and its subsidiaries other than PP&L; Penn Fuel Gas, which provides natural gas distribution, transmission and storage services and sells propane; and H.T. Lyons and McClure, which are mechanical contractor and engineering firms. In February 1999, PP&L Resources acquired McCarl's Inc., another mechanical contractor and engineering firm. Other subsidiaries may be formed by PP&L Resources to take advantage of new business opportunities. The financial condition and results of operations of PP&L and PP&L Global are currently the principal factors affecting PP&L Resources' financial condition and results of operations. The electric utility industry, including PP&L, has experienced and will continue to experience a significant increase in the level of competition in the energy supply market. The Energy Act amended the PUHCA to create a new class of independent power producers, and amended the Federal Power Act to provide open access to electric transmission systems for wholesale transactions. In addition, in December 1996 the Customer Choice Act was enacted in Pennsylvania to restructure the state's electric utility industry in order to create retail access to a competitive market for the generation of electricity. See "PUC Restructuring Proceeding" in Note 3 to Financial Statements and "Increasing Competition" in Review of Financial Condition and Results of Operations for a discussion of competition-related proceedings before the PUC and PP&L's involvement in those proceedings. PP&L is subject to regulation as a public utility by the PUC and is subject in certain of its activities to the jurisdiction of the FERC under Parts I, II and III of the Federal Power Act. PP&L Resources and PP&L have been exempted by the SEC from the provisions of PUHCA applicable to them as holding companies. PP&L is subject to the jurisdiction of the NRC in connection with the operation of the two nuclear-fueled generating units at PP&L's Susquehanna station. PP&L owns a 90% undivided interest in each of the Susquehanna units and Allegheny Electric Cooperative, Inc. owns a 10% undivided interest in each of those units. PP&L also is subject to the jurisdiction of certain federal, regional, state and local regulatory agencies with respect to air and water quality, land use and other environmental matters. The operations of PP&L are subject to the Occupational Safety and Health Act of 1970, and the coal cleaning and loading operations of a PP&L subsidiary are subject to the Federal Mine Safety and Health Act of 1977. PP&L provides electricity delivery service to approximately 1.3 million customers in a 10,000 square mile territory in 29 counties of eastern and central Pennsylvania, with a population of approximately 2.6 million persons. This service area has 129 communities with populations over 5,000, the largest cities of which are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport. In addition to delivery of its own generation or purchased power, PP&L is delivering power supplied by licensed EGS' pursuant to the Customer Choice Act. During 1998, about 96% of total operating revenue was derived from electric energy sales and marketing activities, with 26% coming from residential customers, 22% from commercial customers, 15% from industrial customers, 34% from wholesale sales and 3% from others. PP&L operates its generation and transmission facilities as part of the PJM. The PJM operates the electric transmission network and electric energy market in the mid-Atlantic region of the United States. Bulk electricity is transmitted to wholesale users throughout a geographic area including all or part of Pennsylvania, New Jersey, Maryland, Delaware, Virginia and the District of Columbia. PP&L is also a party to the Mid-Atlantic Area Coordination Agreement, which provides for the coordinated planning of generation and transmission facilities by the companies included in the PJM. In November 1997, the FERC ordered the restructuring of the PJM into an ISO, in order to accommodate greater competition and broader participation in the power pool. The purpose of the ISO is to separate operation of, and access to, the transmission grid from the PJM electric utilities' generation interests. The electric utilities continue to own the transmission assets, but the ISO directs the control and operation of the transmission facilities. See "Increasing Competition" in the Review of Financial Condition and Results of Operations for further details on this PJM restructuring. To take advantage of opportunities in the competitive energy marketplace, PP&L created an Energy Marketing Center in 1995. The group operates a 24-hour trading floor and a marketing effort with responsibility for all PP&L wholesale power transactions. The Energy Marketing Center has allowed PP&L to buy and sell energy at the most competitive prices and to expand these activities beyond PP&L's traditional service territory. Pursuant to the Joint Settlement Petition in its PUC restructuring proceeding, PP&L transferred its retail marketing function to a new subsidiary, PP&L EnergyPlus, in September 1998. PP&L EnergyPlus has a PUC license to act as an EGS. This license permits PP&L EnergyPlus to offer retail electric supply to customers throughout Pennsylvania. In 1999, PP&L EnergyPlus will offer such supply to industrial and commercial customers throughout the state. At this time, PP&L EnergyPlus has decided not to pursue residential customers in the competitive marketplace based on economic considerations. Other wholly-owned subsidiary companies of PP&L principally are engaged in oil and gas pipeline operations, holding cash reserves and passive financial investing. PP&L Global, PP&L Resources' second largest subsidiary after PP&L, is an international independent power company with current investments of $671 million. PP&L Global has ownership and operational interests in distribution companies in the U.K., Chile and El Salvador that deliver electricity to more than 2 million customers. PP&L Global also has investment interests in Argentina, Peru, Spain, Portugal, Bolivia and Brazil. PP&L Global's major investments to date are SWEB, Emel and DelSur. During 1998, PP&L Global reached an agreement to acquire the generation facilities of Bangor-Hydro Electric Company in Maine, totaling 95 megawatts, as well as certain associated transmission rights, for $89 million. In addition, during 1998 PP&L Global signed definitive agreements to purchase 13 Montana power plants, with 2,614 megawatts of generating capacity, for $1.586 billion. The acquisition is subject to several conditions, including the receipt of required state and federal regulatory approvals and third-party consents. The agreements also provide for PP&L Global's acquisition of related transmission assets for $182 million. PP&L Global also has announced plans to develop a 520 megawatt gas-fired power plant in Kingman, Arizona, a 500 - 600 megawatt gas-fired plant in Wallingford, Connecticut, and a 500 - 600 megawatt gas-fired plant in eastern Pennsylvania. PP&L Resources has established growth in its generation capability, along with expansion of its energy marketing operations, as a key element of its business strategy. In addition to the current generating assets of PP&L and the announced acquisitions and developments of PP&L Global discussed above, PP&L Resources plans to add another 7,500 mW of generation within the next five years. FINANCIAL CONDITION See "Earnings" and "Financial Indicators" in the Review of the Financial Condition and Results of Operations for this information. CAPITAL EXPENDITURE REQUIREMENTS See "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations for information concerning PP&L's estimated capital expenditure requirements for the years 1999-2003. See Note 14 to Financial Statements for information concerning PP&L's estimate of the cost to comply with the federal clean air legislation enacted in 1990, to address groundwater degradation and waste water control at PP&L facilities and to comply with solid waste disposal regulations adopted by the DEP. POWER SUPPLY PP&L's system capacity (winter rating) at December 31, 1998 was as follows: Net Kilowatt Plant Capacity ----- -------- Nuclear-fueled steam station Susquehanna 1,995,000 (a) --------- Coal-fired steam stations Montour 1,525,000 Brunner Island 1,469,000 Sunbury 389,000 (b) Martins Creek 300,000 Keystone 210,000 (c) Conemaugh 194,000 (d) Holtwood 73,000 (e) --------- Total coal-fired 4,160,000 --------- Gas and oil-fired steam station Martins Creek 1,592,000 Combustion turbines and diesels 364,000 Hydroelectric 146,000 --------- Total generating capacity 8,257,000 --------- Firm purchases Hydroelectric 139,000 (f) Qualifying facilities 338,000 --------- Total firm purchases 477,000 --------- Total system capacity 8,734,000 ========= ____________________________ (a) PP&L's 90% undivided interest. (b) PP&L has announced its intention to sell the Sunbury station in 1999. (c) PP&L's 12.34% undivided interest. (d) PP&L's 11.39% undivided interest. (e) Holtwood is scheduled to be closed on May 1, 1999. (f) From Safe Harbor Water Power Corporation. The system capacity shown in the preceding tabulation does not reflect two-party sales and purchases, contractual bulk power sales to JCP&L and BG&E, and installed capacity credit sales and purchases with other utilities. The net effect of these transactions is to reduce system capacity by 1,039,000 kilowatts at the end of December 1998 to 7,695,000 kilowatts. The capacity of generating units is based upon a number of factors, including the operating experience and physical condition of the units, and may be revised from time to time to reflect changed circumstances. During 1998, PP&L produced about 41.7 billion kWh in plants it owned. PP&L also purchased 28.8 billion kWh, and had 35.3 billion kWh in non-system energy sales. During 1998, 59% of the energy generated by PP&L's plants came from coal- fired stations, 35% from nuclear operations at the Susquehanna station, 4% from the Martins Creek gas and oil-fired station and 2% from hydroelectric stations. The maximum one-hour demand recorded on PP&L's system is 6,688,000 kilowatts, which occurred on January 14, 1999. The maximum recorded one-hour summer demand is 6,046,000 kilowatts, which occurred on July 15, 1997. These peak demands do not include energy sold to Atlantic, BG&E or JCP&L. PP&L purchases energy from and sells energy to other utilities and FERC- certified power marketers. PP&L enters into these transactions on an hourly, daily, weekly, monthly or longer-term basis. PP&L has a FERC short-term capacity and/or energy sales tariff enabling PP&L to sell to other utilities and marketers. As of the end of 1998, ninety utilities and marketers had signed service agreements under this cost-based tariff. Transactions under these agreements allow PP&L to make more efficient use of its generating resources and are intended to provide benefits to both PP&L and the other parties. Under this tariff, PP&L may also sell power purchased from third parties, which increases PP&L's capabilities for profitable wholesale transactions. PP&L also has FERC authorization to sell electric energy and capacity at market-based rates to wholesale customers located both inside and outside the PJM control area. Seventy parties have signed service and power sales agreements for transactions under this market-based rates tariff. PP&L has an export license to sell capacity and/or energy to electric utilities in Canada. This export license allows PP&L to sell either its own capacity and energy not required to serve domestic obligations or power purchased from other utilities. See Note 5 to Financial Statements for additional information concerning the sale of capacity and energy to Atlantic, BG&E and JCP&L. In addition to the 338,000 kilowatts of qualifying facility generation included in the total system capacity table above, PP&L is purchasing about 12,000 kilowatts of output from various other non-utility generating companies. In an effort to reduce operating costs and position itself for the competitive marketplace, PP&L in August 1998 announced the closing of its Holtwood coal-fired generating station, effective May 1, 1999. The adjacent hydroelectric plant will continue to operate. In addition, PP&L announced its intention to sell its Sunbury coal-fired generating station in 1999. FUEL SUPPLY Coal ---- During 1998, about 55% of the coal delivered to PP&L's generating stations was purchased under contracts and 45% was obtained through open market purchases. Contracts with non-affiliated coal producers provided PP&L with about 4.2 million tons of coal in 1998 and are expected to provide PP&L with about 5.0 million tons in 1999. PP&L's requirements for additional coal are expected to be obtained by contracts and open market purchases. The amount of coal carried in inventory at PP&L's generating stations varies from time to time depending on market conditions and plant operations. As of December 31, 1998, PP&L's coal supply was sufficient for at least 34 days of operations. The coal burned in PP&L's generating stations contains both organic and pyritic sulfur. Mechanical cleaning processes are utilized to reduce the pyritic sulfur content of the coal. The reduction of the pyritic sulfur content by either mechanical cleaning or blending has lowered the total sulfur content of the coal burned to levels which permit compliance with current sulfur dioxide emission regulations established by the DEP. For information concerning PP&L's plans to achieve compliance with the federal clean air legislation enacted in 1990, see "Environmental Matters" in Note 14 to Financial Statements. PP&L owns a 12.34% undivided interest in the Keystone station and an 11.39% undivided interest in the Conemaugh station, both of which are generating stations located in western Pennsylvania. The owners of the Keystone station have a long-term contract with a coal supplier to provide at least two-thirds of that station's requirements through 1999 and declining amounts thereafter until the contract expires at the end of 2004. The balance of the Keystone station requirements are purchased in the open market. The coal supply requirements for the Conemaugh station are being met from several sources through a blend of long-term and short-term contracts and spot market purchases. Oil and Natural Gas - ------------------- PP&L's Martins Creek generating station Units 3 and 4 burn both oil and natural gas. During 1998, 100% of the oil requirements for the Martins Creek units was purchased on the spot market. As of December 31, 1998, PP&L has no long-term agreements for these requirements. During 1998, all of the natural gas consumed at Martins Creek was purchased and transported under short-term agreements that were one month or less in duration. PP&L does not have any long-term agreements to purchase gas or gas transportation. PP&L's oil and natural gas purchasing and sales functions are now performed by the Energy Marketing Center. The addition of oil and gas to the Energy Marketing Center's electricity trading enhances wholesale and retail marketing efforts and provides a diversified energy portfolio to offer customers. Additionally, the new trading activities create opportunities to optimize electric generation efficiency and minimize fuel costs. Nuclear ------- PP&L has entered into uranium supply and conversion agreements that satisfy 100% of the uranium requirements for the Susquehanna units through 1999, approximately 45% of the requirements for the period 2000-2002 and, including options, an additional 25% of the requirements for the period 2003-2005. Deliveries under these agreements are expected to provide sufficient quantities of uranium to permit Unit 1 to operate into the first quarter of 2002 and Unit 2 to operate into the first quarter of 2001. PP&L has entered into an agreement that satisfies 100% of its enrichment requirements through 2004. Assuming that other portions of the nuclear fuel cycle are met, deliveries under this agreement are expected to provide sufficient enrichment to permit Unit 1 to operate into the first quarter of 2006 and Unit 2 to operate into the first quarter of 2007. PP&L has entered into an agreement that, including options, satisfies 100% of its fabrication requirements through 2006. Assuming that other portions of the nuclear fuel cycle are met, deliveries under this agreement are expected to provide sufficient fabrication to permit Unit 1 to operate into the first quarter of 2008 and Unit 2 to operate into the first quarter of 2007. PP&L estimates that there is sufficient storage capacity in the spent nuclear fuel pools at Susquehanna to accommodate the fuel that is expected to be discharged through the end of 1999. Federal law requires the federal government to provide for the permanent disposal of commercial spent nuclear fuel. Pursuant to the requirements of that law, the DOE has initiated an analysis of a site in Nevada for a permanent nuclear waste repository. Progress on characterization of a proposed disposal facility has been slow, and the repository is not expected to be operational before 2010. Thus, expansion of Susquehanna's on-site spent fuel storage capacity is necessary. To support this expansion, PP&L has contracted for the design and construction of a spent fuel storage facility employing dry cask fuel storage technology at the Susquehanna station. The facility will be modular so that additional storage capacity can be added as needed. PP&L currently expects that the new facility will be available to start receiving nuclear spent fuel in 1999. See "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations. Federal law also provides that certain costs of spent nuclear fuel disposal are the responsibility of the generators of such wastes. In January 1997, PP&L joined over 30 other utilities in a lawsuit in the U.S. Court of Appeals for the District of Columbia Circuit seeking assurance of the DOE's performance of its contractual obligation to accept the spent nuclear fuel and suspension of the payment of fees to that agency pending such performance. In November 1997, the Court denied the utilities' requested relief and held that the contracts between the utilities and the DOE provide a potentially adequate remedy (i.e., monetary damages) if the DOE fails to begin disposal of spent nuclear fuel by January 31, 1998. However, the Court also precluded the DOE from arguing that its delay in contract performance was "unavoidable". YEAR 2000 See "Year 2000" in the Review of the Financial Condition and Results of Operations for information. ENVIRONMENTAL MATTERS PP&L is subject to certain present and developing federal, regional, state and local laws and regulations with respect to air and water quality, land use and other environmental matters. See "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations for information concerning environmental expenditures during 1998 and PP&L's estimate of those expenditures during the years 1999-2003. PP&L believes that it is presently in substantial compliance with applicable environmental laws and regulations. See "Environmental Matters" in Note 14 to Financial Statements for information concerning federal clean air legislation enacted in 1990, groundwater degradation and waste water control at PP&L facilities, the DEP's solid waste disposal regulations and PP&L's agreement with the DEP concerning remediation at certain sites of past operations. Other environmental laws, regulations and developments that may have a substantial impact on PP&L are discussed below. Air --- The Clean Air Act includes, among other things, provisions that: (a) require the prevention of significant deterioration of existing air quality in regions where air quality is better than applicable ambient standards; (b) restrict the construction of and revise the performance standards for new coal- fired and oil-fired generating stations; and (c) authorize the EPA to impose substantial noncompliance penalties of up to $25,000 per day of violation for each facility found to be in violation of the requirements of an applicable state implementation plan. The DEP administers the EPA's air quality regulations through the Pennsylvania State Implementation Plan and has concurrent authority to impose penalties for noncompliance. At this time, PP&L is meeting all requirements of Phase I of the Clean Air Act. In December 1997, international negotiators reached agreement in Kyoto, Japan to strengthen the 1992 United Nations Global Climate Change Treaty by adding legally-binding greenhouse gas emission limits. This Agreement - formally called the Kyoto Protocol - if ratified by the U.S. Senate and implemented, would require the United States to reduce its greenhouse gas emissions to 7% below 1990 levels by the period 2008 to 2012. Compliance under the Agreement, if implemented, could result in increased capital and operating expenses for PP&L in amounts which are not now determinable but which could be material. Water ----- To implement the requirements established by the Federal Water Pollution Control Act of 1972, as amended by the Clean Water Act of 1977 and the Water Quality Act of 1987, the EPA has adopted regulations including effluent standards for steam electric stations. The DEP administers the EPA's effluent standards through state laws and regulations relating, among other things, to effluent discharges and water quality. The standards adopted by the EPA pursuant to the Clean Water Act may have a significant impact on PP&L's existing facilities, depending on the DEP's interpretation and future amendments to its regulations. The EPA and DEP limitations, standards and guidelines for the discharge of pollutants from point sources into surface waters are implemented through the issuance of NPDES permits. PP&L has the NPDES permits necessary for the operation of its facilities. Pursuant to the Surface Mining and Reclamation Act of 1977, the OSM has adopted effluent guidelines which are applicable to PP&L subsidiaries as a result of their past coal mining and continued coal processing activities. The EPA and the OSM limitations, guidelines and standards also are enforced through the issuance of NPDES permits. In accordance with the provisions of the Clean Water Act and the Reclamation Act of 1977, the EPA and the OSM have authorized the DEP to implement the NPDES program for Pennsylvania sources. Compliance with applicable water quality standards is assured by DEP review of NPDES permit conditions. PP&L's subsidiaries have received NPDES permits for their mines and related facilities. Solid and Hazardous Waste ------------------------- The RCRA regulates the generation, transportation, treatment, storage and disposal of hazardous wastes. RCRA also imposes joint and several liability on generators of solid or hazardous waste for clean-up costs. A revision of RCRA in late-1984 lowered the threshold for the amount of on-site hazardous waste generation requiring regulation and incorporated underground tanks used for the storage of petroleum and petroleum products as regulated units. Based upon the results of a survey of its solid waste practices, PP&L in the past has filed notices with the EPA indicating that hazardous waste is occasionally generated at all of its steam electric generating stations and service centers. PP&L has established specific operating procedures for handling this hazardous waste. Therefore, at this time, RCRA and related DEP regulations are not expected to have a significant additional impact on PP&L. The provisions of Superfund authorize the EPA to require past and present owners of contaminated sites and generators of any hazardous substance found at a site to clean-up the site or pay the EPA or the state for the costs of clean- up. The generators and past owners can be liable even if the generator contributed only a minute portion of the hazardous substances at the site. Present owners can be liable even if they contributed no hazardous substances to the site. The Pennsylvania Superfund law also gives the DEP broad authority to identify hazardous or contaminated sites in Pennsylvania and to order owners or responsible parties to clean-up the sites. If responsible parties cannot or will not perform the clean-up, the DEP can hire contractors to clean-up the sites and then require reimbursement from the responsible parties after the clean-up is completed. To date, PP&L has principally been involved in federal, rather than state, Superfund sites. PP&L has completed removal of coal tar from one subsurface accumulation at a former coal gasification plant site in Monroe County, Pennsylvania and currently expects that significant additional remedial action will not be required. PP&L has entered into agreements with the adjacent property owner and DEP to share the past and future costs of remediating this site. PP&L's share of these costs, including future monitoring, is approximately $3 million, all of which has been spent or accrued. PP&L has removed coal tar in two brick pits on the site of a former gas plant and from river sediment adjacent to the site in Columbia, Pennsylvania. The cost of investigation and remediation of the areas of the site where such action has been required is estimated at $3 million, all of which has been spent or accrued. There also is coal tar contamination of the soil and groundwater at the site. Further remediation of these other areas of the site may be required, the costs of which are not now determinable but could be material. PP&L at one time also owned and operated several other gas plants in its service area. None of these sites is presently on the Superfund list. However, a few of them may be possible candidates for listing at a future date. PP&L expects to continue to investigate and, if necessary, remediate these sites. The cost of this work is not now determinable but could be material. PP&L is involved in several other sites where it may be required, along with other parties, to contribute to investigation and remediation. Some of these sites have been listed by the EPA under Superfund, and others may be candidates for listing at a future date. Future investigation or remediation work at sites currently under review, or at sites currently unknown, may result in material additional operating costs which PP&L cannot estimate at this time. In addition, certain federal and state statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental agencies, such as the EPA and the DEP, to seek compensation from the responsible parties for the lost value of damaged natural resources. The EPA and the DEP may file such compensation claims against the parties, including PP&L, to be held responsible for clean-up of such sites. Such natural resource damage claims against PP&L could result in additional material liabilities. See Item 3 "LEGAL PROCEEDINGS" for information concerning an EPA order and a complaint filed by the EPA in federal district court against PP&L and 35 unrelated parties for remediation of a Superfund site in Berks County, Pennsylvania; a complaint filed by PP&L and 16 unrelated parties in federal district court against other parties for contribution under Superfund relating to the Novak landfill Superfund site in Lehigh County, Pennsylvania and a related action by the EPA against PP&L and 29 unrelated parties to recover the agency's past and future costs at the Novak landfill site; an action by the EPA for reimbursement of the EPA's past response costs and remediation at the site of a former metal salvaging operation in Montour County, Pennsylvania; and PP&L's challenge to the DEP's right to collect fees for emissions from PP&L's coal-fired units. Low-Level Radioactive Waste --------------------------- Under federal law, each state is responsible for the disposal of low-level radioactive waste generated in that state. States may join in regional compacts to jointly fulfill their responsibilities. The states of Pennsylvania, Maryland, Delaware and West Virginia are members of the Appalachian States Low- Level Radioactive Waste Compact. Efforts to develop a regional disposal facility in Pennsylvania were suspended by the DEP in 1998. The Commonwealth retains the legal authority to resume the siting process should it be necessary. Low-level radioactive waste resulting from the operation of Susquehanna are currently being sent to Barnwell, South Carolina for disposal. In the event that this disposal option becomes unavailable or no longer cost-effective, the low-level radioactive waste will be stored on-site at Susquehanna. PP&L cannot predict the future availability of low-level waste disposal facilities or the cost of such disposal. General ------- Concerns have been expressed by some members of the scientific community and others regarding the potential health effects of EMFs. These fields are emitted by all devices carrying electricity, including electric transmission and distribution lines and substation equipment. Federal, state and local officials have focused attention on this issue. PP&L supports the current efforts to determine whether EMFs cause any human health problems and is taking low cost or no cost steps to reduce EMFs, where practical, in the design of new transmission and distribution facilities. PP&L is unable to predict what effect, if any, the EMF issue might have on PP&L operations and facilities and the associated cost, or what, if any, liabilities PP&L might incur related to the EMF issue. In addition to the matters described above, PP&L and its subsidiaries have been cited from time to time for temporary violations of the DEP and the EPA regulations with respect to air and water quality and solid waste disposal in connection with the operation of their facilities and may be cited for such violations in the future. As a result, PP&L and its subsidiaries may be subject to certain penalties which are not expected to be material in amount. PP&L is unable to predict the ultimate effect of evolving environmental laws and regulations upon its existing and proposed facilities and operations. In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including the areas of water and air quality, hazardous and solid waste handling and disposal and toxic substances, PP&L may be required to modify, replace or cease operating certain of its facilities. PP&L may also incur material capital expenditures and operating expenses in amounts which are not now determinable. FRANCHISES AND LICENSES PP&L has authority to provide electric public utility service throughout its entire service area as a result of grants by the Commonwealth of Pennsylvania in corporate charters to PP&L and companies to which it has succeeded and as a result of certification thereof by the PUC. PP&L has been granted the right to enter the streets and highways by the Commonwealth subject to certain conditions. In general, such conditions have been met by ordinance, resolution, permit, acquiescence or other action by an appropriate local political subdivision or agency of the Commonwealth. PP&L also has an export license from the DOE to sell capacity and/or energy to electric utilities in Canada. PP&L operates Susquehanna Unit 1 and Unit 2 pursuant to NRC operating licenses which expire in 2022 and 2024, respectively. PP&L operates two hydroelectric projects pursuant to licenses which were renewed by the FERC in 1980: Wallenpaupack (44,000 kilowatts capacity) and Holtwood (102,000 kilowatts capacity). The Wallenpaupack license expires in 2004 and the Holtwood license expires in 2014. PP&L also owns one-third of the capital stock of Safe Harbor Water Power Corporation, which holds a project license which extends until 2030 for the operation of its hydroelectric plant. The total capacity of the Safe Harbor plant is 417,500 kilowatts, and PP&L is entitled by contract to one-third of the total capacity (139,000 kilowatts). EMPLOYEE RELATIONS As of December 31, 1998, PP&L Resources and its subsidiaries had approximately 7,600 employees including 6,344 full-time PP&L employees. Approximately 65 percent of PP&L's full-time employees are represented by the IBEW. PP&L reached a new labor agreement with the IBEW in 1998. This agreement expires in May 2002. ITEM 2. PROPERTIES ------------------ Reference is made to the "Utility Plant" section of Note 1 to Financial Statements as well as to "Power Plant Operations" in the Review of the Financial Condition and Results of Operations for information concerning investments in property, plant and equipment. Substantially all electric utility plant is subject to the lien of PP&L's Mortgage. For a description of PP&L's service territory and additional information concerning the properties of PP&L, see Item 1, "BUSINESS - Power Supply" and "BUSINESS - Fuel Supply." See Item 1 "BUSINESS-Background" for a discussion of PP&L Global's investments. ITEM 3. LEGAL PROCEEDINGS ------------------------- Reference is made to Note 3 to Financial Statements for information concerning PP&L's restructuring proceeding before the PUC under the Customer Choice Act. Reference is made to "Increasing Competition" in the Review of the Financial Condition and Results of Operations for information concerning pending proceedings before the FERC regarding wholesale customers and restructuring of the PJM. Reference is made to Item 1 "BUSINESS - Fuel Supply" for information concerning a lawsuit against the DOE for failure of that agency to perform certain contractual obligations. In 1998, PP&L settled all outstanding disputes and litigation with SER, a non-utility generating company from which PP&L purchases power under PURPA. This litigation related to the power purchase agreement between the parties and SER's status as a qualifying cogeneration facility. Specifically, in August 1998 PP&L executed an agreement with SER providing that, effective January 1, 1999, the PP&L/SER power purchase agreement will be amended to provide that SER will receive 6.6 cents/kWh for generation up to 79.5 MW, as long as SER operates a "qualifying facility" under FERC rules. Generation in excess of 79.5 MW will continue to be sold at rates in the existing power purchase agreement. Subject to regulatory requirements, SER will be permitted, but not required, to sell generation above 80.5 MW to third parties. In November 1998, PP&L and SER executed a second settlement providing that: (i) SER will make two cash payments totaling $30 million to PP&L in December 1998; (ii) PP&L will retain approximately $8 million in payments withheld from SER from March through December 1998 as a result of PP&L's reduction in the rate paid to SER for purchased power; (iii) SER will pay PP&L an additional $4.5 million in total, plus interest, over the remaining 11 years of the power purchase agreement; (iv) PP&L and SER will conclude all outstanding litigation and disputes; and (v) PP&L will grant SER normal and emergency minimum operating levels and curtailment terms like those in place for most of PP&L's other NUGs. Both cash payments totaling $30 million were made by SER to PP&L in December 1998. In April 1991, the U.S. Department of Labor through its MSHA issued citations to one of PP&L's coal-mining subsidiaries for alleged coal-dust sample tampering at one of the subsidiary's mines. Citations were also issued against the independent operator of another subsidiary mine, who is also contesting the citations issued with respect to that mine. The MSHA at the same time issued similar citations to more than 500 other coal-mine operators. After the U.S. Court of Appeals for the District of Columbia Circuit affirmed the ruling of the Mine Safety and Health Review Commission in favor of one of the mine operators in a test case, the Secretary of Labor in September 1998 moved to vacate and dismiss all of the pending cases against the mine operators, including the PP&L subsidiary. MSHA has indicated that it intends to withdraw all of its citations, which would conclude all of these pending cases against the mine operators, including PP&L's subsidiary. In August 1994, PP&L filed a rate complaint with the federal Interstate Commerce Commission, now the Surface Transportation Board, challenging Consolidated Rail Corporation's (Conrail's) coal transportation rates from interchange points with connecting carriers to PP&L's power plants. In September 1995, PP&L amended its complaint to add the connecting carriers, CSX Corporation and Norfolk Southern Corporation, as additional defendants. In September 1997, PP&L reached an agreement with the carriers to settle this case. The settlement was conditioned on the outcome of the joint Norfolk Southern/CSX application to take control of Conrail. The Surface Transportation Board approved the Conrail takeover in July 1998. Under the terms of the settlement, PP&L began paying lower coal transportation rates in October 1998. In August 1991, PP&L and 35 other unrelated parties received an EPA order under CERCLA requiring that certain remedial actions be taken at a former oil recovery site in Berks County, Pennsylvania, which has been included on the federal Superfund list. PP&L had been identified by the EPA as a potentially responsible party, along with over 100 other parties. The EPA order required remediation by the 36 named parties of four specific areas of the site. Remedial action under this order has been completed at a cost of approximately $2 million, of which PP&L's interim share was approximately $50,000. The EPA at the same time filed a complaint under Section 107 of CERCLA in the District Court against PP&L and the same 35 unrelated parties. The complaint asks the District Court to hold the parties jointly and severally liable for all EPA's past costs at the site and future costs of remediating some of the remaining areas of the site. The EPA claims it has spent approximately $21 million to date. PP&L and a group of the other named parties have sued approximately 460 other parties in District Court, claiming that these parties contributed waste to the site, and demanding that these companies contribute to the clean-up costs. In July 1993, PP&L and 33 of the 35 unrelated parties received an EPA order under Section 106 of CERCLA requiring remediation of the remaining areas of the site identified by the EPA. The current estimate of remediating the remainder of the site is approximately $18 million. These costs would be shared among the responsible parties. PP&L and other parties to the lawsuit have reached a settlement among themselves and the federal government regarding these claims. PP&L's share of the settlement amount is not material. In December 1991, PP&L and 16 unrelated parties filed complaints against 64 other parties in District Court seeking reimbursement under CERCLA for costs the plaintiffs have incurred and will incur to investigate and remediate the Novak landfill site in Lehigh County, Pennsylvania. In January 1997, the EPA filed an action against PP&L and 29 other parties under Section 107 of CERCLA to recover the EPA's past costs at the site, which it alleges are in excess of $990,000. The parties have settled these actions. In addition, the EPA has issued an order under Section 106 of CERCLA against PP&L and several other parties to jointly remediate the site. The current estimate of implementing this remedy is approximately $17 million. PP&L's share of the remediation cost at this site is not expected to be material. In April 1993, PP&L received an order under Section 106 of CERCLA requiring that actions be taken at the site of a former metal salvaging operation in Montour County, Pennsylvania. The EPA took similar action with two other potentially responsible parties at the site. The Company has reached a settlement with the EPA for this site for an amount that is not material. PP&L challenged the DEP's right to collect air emission fees for hazardous air pollutants (HAPs) from PP&L's coal-fired units and air emission fees for emissions from PP&L's Phase I-affected units from 1995 through 1999. (Phase I- affected units were those units required by the Clean Air Act, or which voluntarily opted into the requirement, to make certain reductions in SO2 and NOx emissions by 1995; all others must make these reductions by 2000.) The HAPs emissions fees are approximately $200,000 per year. The emission fees for Phase I-affected units from 1995 through 1999 are estimated at $1.6 million. PP&L and the DEP have finalized a settlement of this litigation, under which (i) PP&L will pay reduced fees for the Phase I-affected units from 1995-1999 and will pay all HAPs fees as assessed; and (ii) no penalties or interest will be imposed by DEP. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------- There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 1998. EXECUTIVE OFFICERS OF THE REGISTRANTS ------------------------------------- Officers of PP&L Resources and PP&L are elected annually by their Boards of Directors to serve at the pleasure of the respective Boards. There are no family relationships among any of the executive officers, or any arrangement or understanding between any executive officer and any other person pursuant to which the officer was selected. There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years. Listed below are the executive officers as of December 31, 1998: PP&L RESOURCES, INC.: Effective Date of Election to Name Age Position Present Position - ------------------ --------- --------- ----------------- William F. Hecht 55 Chairman, President and Chief Executive February 24, 1995 Officer Frank A. Long 58 Executive Vice President February 24, 1995 Robert G. Byram* 53 Senior Vice President- Generation and Chief Nuclear Officer - PP&L April 1, 1997 John R. Biggar 54 Senior Vice President and Chief Financial Officer November 1, 1998 Robert D. Fagan* 53 President - PP&L Global, Inc. December 20, 1995 Robert J. Grey 48 Senior Vice President, General Counsel and Secretary March 1, 1996 Terry H. Hunt 50 Senior Vice President- Strategic Planning October 1, 1998 Joseph J. McCabe 48 Vice President and Controller August 1, 1995 * Mr. Byram and Mr. Fagan have been designated executive officers of PP&L Resources by virtue of their respective positions at PP&L Resources subsidiaries. PP&L, Inc. Effective Date of Election to Name Age Position Present Position - ------------------ --------- --------- ----------------- William F. Hecht 55 Chairman, President and Chief Executive Janaury 1, 1993 Officer Frank A. Long 58 Executive Vice President and Chief January 1, 1993 Operating Officer Robert G. Byram 53 Senior Vice President- Generation and Chief Nuclear Officer April 1, 1997 John R. Biggar 54 Senior Vice President and Chief Financial November 1, 1998 Officer Robert J. Grey 48 Senior Vice President, General Counsel and March 1, 1996 Secretary Terry H. Hunt 50 Senior Vice President- Strategic Planning October 1, 1998 Joseph J. McCabe 48 Vice President and Controller August 1, 1995 Each of the above officers, with the exception of Messrs. Fagan, Grey, Hunt and McCabe, has been employed by PP&L for more than five years as of December 31, 1998. Mr. Fagan joined PP&L Global in November 1994. Prior to that time, he was Vice President and General Manager at Mission Energy Company. Mr. McCabe joined PP&L in May 1994 and was previously a partner of Deloitte & Touche LLP. Mr. Grey joined PP&L in March 1995. He had been General Counsel of Long Island Lighting Company since 1992. Mr. Hunt joined PP&L in October 1998. He also is the President and CEO of Penn Fuel Gas and its subsidiaries. Prior to their election to the positions shown above, the following executive officers held other positions within PP&L since January 1, 1994: Mr. Byram was Senior Vice President - Nuclear; Mr. Biggar was Vice President- Finance, Vice President - Finance and Treasurer and Senior Vice President- Financial; Mr. Grey was Vice President, General Counsel and Secretary, and Mr. McCabe was Controller. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ------------------- Additional information for this item is set forth in the sections entitled "Quarterly Financial, Common Stock Price and Dividend Data" and "Shareowner and Investor Information" of this report. The number of common shareowners is set forth in the section entitled "Selected Financial and Operating Data" in Item 6.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA 1998 (a) 1997 (a) 1996 1995 (a) 1994 (a) PP&L Resources, Inc. - ------------------------------------------------------------------------------------------------------------------------------ Income Items -- millions Operating revenues................................... $ 3,786 $ 3,077 $ 2,926 $ 2,752 $ 2,725 Operating income (g)................................. 827 800 810 836 719 Net Income (Loss).................................... (569) 296 329 323 216 (e) Balance Sheet Items -- millions (b) Property, plant and equipment, net................... 4,480 6,820 6,960 6,970 7,195 Recoverable transition costs......................... 2,819 Total assets......................................... 9,607 9,485 9,670 9,492 9,372 Long-term debt....................................... 2,984 2,735 2,832 2,859 2,941 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures.................. 250 250 Preferred stock With sinking fund requirements..................... 47 47 295 295 295 Without sinking fund requirements.................. 50 50 171 171 171 Common equity........................................ 1,790 2,809 2,745 2,597 2,454 Short-term debt...................................... 636 135 144 89 74 Total capital provided by investors.................. 5,757 6,026 6,187 6,011 5,936 Capital lease obligations............................ 168 171 247 220 225 Financial Ratios Return on average common equity -- % (f)............ 13.39 10.60 12.30 12.81 8.73 Embedded cost rates (b) Long-term debt -- %................................ 7.40 7.88 7.89 7.95 8.07 Preferred stock -- %............................... 5.87 5.85 6.09 6.09 6.07 Preferred securities (pre-tax) -- %................ 8.43 8.43 Times interest earned before income taxes (f)........ 3.69 3.39 3.55 3.56 2.73 Ratio of earnings to fixed charges -- total enterprise basis (c)............................... 3.48 3.22 3.45 3.47 2.70 Ratio of earnings to fixed charges and dividends on preferred stock --total enterprise basis (c)...................... 3.12 2.85 2.90 2.91 2.27 Common Stock Data Number of shares outstanding -- thousands Year-end........................................... 157,412 166,248 162,665 159,403 155,482 Average............................................ 164,651 164,550 161,060 157,649 153,458 Number of shareowners (b)............................ 100,458 117,293 123,290 128,075 132,632 Earnings (loss) per share - reported................. ($3.46) $ 1.80 $ 2.05 $ 2.05 $ 1.41 Earnings (loss) per share excluding extraordinary items (f)............................ $ 2.29 $ 1.80 $ 2.05 $ 2.05 $ 1.41 Dividends declared per share......................... $ 1.335 $ 1.67 $ 1.67 $ 1.67 $ 1.67 Book value per share (b)............................. $ 11.37 $ 16.90 $ 16.87 $ 16.29 $ 15.79 Market price per share (b)........................... $ 27.875 $ 23.938 $ 23 $ 25 $ 19 Dividend payout rate -- % (f)........................ 58 93 82 82 119 Dividend yield -- % (d).............................. 4.79 6.98 7.26 6.68 8.79 Price earnings ratio (f)............................. 12.17 13.30 11.22 12.20 13.48 (a) Earnings for 1998, 1997, 1995 and 1994 were affected by several one-time adjustments. Results for 1998 also include the impact of extraordinary items. These adjustments affected net income and certain items under Financial Ratios and Common Stock Data. See Financial Notes 4, 10 and 11. (b) At year-end (c) Computed using earnings and fixed charges of PP&L Resources and its subsidiaries. Fixed charges consist of interest on short- and long-term debt, other interest charges, interest on capital lease obligations and the estimated interest component of other rentals. (Extraordinary items excluded from 1998 calculations.) (d) Based on year-end market prices. (e) Results for 1994 restated to reflect formation of the holding company. (f) Results for 1998 based on earnings per share excluding extraordinary items. (g) Operating income of 1997 and earlier years restated to conform to the current presentation. Note: See Results of Operations - "Financial Indicators" for selected ratios for 1996, 1997 and 1998 based on fully-adjusted earnings.
SELECTED FINANCIAL AND OPERATING DATA
1998 (a) 1997 (a) 1996 1995 (a) 1994 (a) PP&L, Inc. - ------------------------------------------------------------------------------------------------------------------------ INCOME ITEMS -- millions Operating revenues..................................... $ 3,643 $ 3,049 $ 2,911 $ 2,752 $ 2,725 Operating income (f)................................... 801 790 809 836 719 Earnings (Loss) available to PP&L Resources, Inc. (587) 308 329 324 215 (d) BALANCE SHEET ITEMS -- MILLIONS (b) Property, plant and equipment, net..................... 4,331 6,820 6,960 6,970 7,195 Recoverable transition costs........................... 2,819 Total assets........................................... 8,838 9,472 9,405 9,424 9,321 Long-term debt......................................... 2,569 2,633 2,832 2,859 2,941 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures............................ 250 250 Preferred stock With sinking fund requirements....................... 295 295 295 295 295 Without sinking fund requirements.................... 171 171 171 171 171 Common equity.......................................... 1,730 2,612 2,617 2,528 2,404 Short-term debt........................................ 80 45 10 89 74 Total capital provided by investors.................... 5,095 6,006 5,925 5,942 5,885 Capital lease obligations 168 171 247 220 225 FINANCIAL RATIOS Return on average common equity -- % (e)............... 13.61 11.75 12.95 13.10 8.83 Embedded cost rates (b) Long-term debt -- %.................................. 7.56 7.91 7.89 7.95 8.07 Preferred stock -- %................................. 6.09 6.90 6.09 6.09 6.07 Preferred securities (pre-tax) -- %.................. 8.43 8.43 Times interest earned before income taxes (e).......... 4.22 3.67 3.62 3.58 2.73 Ratio of earnings to fixed charges -- total enterprise basis (c)................................. 3.93 3.47 3.50 3.48 2.70 Ratio of earnings to fixed charges and dividends on preferred stock --total enterprise basis (c)........................ 3.04 2.77 2.93 2.92 2.26 REVENUE DATA Average price per kWh billed for service area sales - cents...................................... 7.26 7.36 7.38 7.21 7.24 SALES DATA Customers (thousands)(b)............................... 1,257 1,247 1,236 1,226 1,213 Electric energy sales delivered -- millions of kWh Residential.......................................... 11,156 11,434 11,849 11,300 11,444 Commercial........................................... 10,597 10,309 10,288 9,948 9,715 Industrial........................................... 10,220 10,078 10,016 9,845 9,536 Other................................................ 164 143 154 188 236 ----------- -------- -------- -------- -------- Service area sales................................. 32,137 31,964 32,307 31,281 30,931 Wholesale energy sales............................. 36,706 21,454 14,341 11,424 10,848 ----------- -------- -------- -------- -------- Total electric energy sales delivered.............. 68,843 53,418 46,648 42,705 41,779 ----------- -------- -------- -------- -------- NUMBER OF FULL-TIME EMPLOYEES (b)........................ 6,344 6,343 6,428 6,661 7,431 (a) Earnings for 1998, 1997, 1995 and 1994 were affected by several one-time adjustments. Results for 1998 also include the impact of extraordinary items. This affected earnings available to PP&L Resources and certain items in Financial Ratios. See Financial Note 4. (b) At year-end (c) Computed using earnings and fixed charges of PP&L and its subsidiaries. Fixed charges consist of interest on short-and long-term debt, other interest charges, interest on capital lease obligations and the estimated interest component of other rentals. (Extraordinary items excluded from 1998 calculations.) (d) Results for 1994 restated to reflect formation of the holding company. (e) Results for 1998 based on earnings per share excluding extraordinary items. (f) Operating income of 1997 and earlier years restated to conform to the current presentation.
ITEM 7. REVIEW OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PP&L RESOURCES, INC. AND PP&L, INC. PP&L Resources is a holding company with headquarters in Allentown, PA. Its subsidiaries include PP&L, which provides electricity delivery service in eastern and central Pennsylvania, sells retail electricity throughout Pennsylvania and markets wholesale electricity in 28 states and Canada; PP&L EnergyPlus (a subsidiary of PP&L), which sells competitively-priced energy and energy services to newly deregulated markets; PP&L Global, an international independent power company which invests in and develops worldwide power projects; PP&L Spectrum, which markets energy-related services and products; PP&L Capital Funding, which provides debt funding for PP&L Resources and its subsidiaries other than PP&L; Penn Fuel Gas, which provides natural gas distribution, transmission and storage services and sells propane; and H.T. Lyons and McClure, which are mechanical contractor and engineering firms. In February 1999, PP&L Resources acquired McCarl's Inc., another mechanical contractor and engineering firm. Other subsidiaries may be formed by PP&L Resources to take advantage of new business opportunities. The financial condition and results of operations of PP&L and PP&L Global are currently the principal factors affecting the financial condition and results of operations of PP&L Resources. All fluctuations, unless specifically noted, are primarily due to activities of PP&L and PP&L Global. Terms and abbreviations appearing in the Review of the Financial Condition and Results of Operations are explained in the glossary. Forward-looking Information --------------------------- Certain statements contained in this Form 10-K concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts, are "forward-looking statements" within the meaning of the federal securities laws. Although PP&L Resources and PP&L believe that the expectations reflected in these statements are reasonable, there can be no assurance that these expectations will prove to have been correct. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in the forward- looking statements. The following are among the factors that could cause actual results to differ materially from the forward-looking statements: state and federal regulatory developments; new state or federal legislation; national or regional economic conditions; market demand and prices for energy and capacity; weather variations affecting customer energy usage; competition in retail and wholesale power markets; the need for and effect of any business or industry restructuring; PP&L Resources' and PP&L's profitability and liquidity; new accounting requirements or new applications of existing requirements; operating performance of plants and other facilities; environmental conditions and requirements; system conditions (including actual results in achieving Year 2000 compliance by PP&L Resources, its subsidiaries and others) and operating costs; performance of new ventures; political, regulatory or economic conditions in foreign countries where PP&L Global makes investments; foreign exchange rates; and PP&L Resources' and PP&L's commitments and liabilities. Any such forward-looking statements should be considered in light of such important factors and in conjunction with PP&L Resources' and PP&L's other documents on file with the SEC. New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for PP&L Resources or PP&L to predict all of such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and neither PP&L Resources nor PP&L undertakes any obligation to update the information contained in such statement to reflect subsequent developments or information. Results of Operations --------------------- Earnings Excluding the effects of weather and several one-time and other adjustments, most of which are related to the transition to a competitive electricity market in Pennsylvania, earnings per share were $2.07 in 1998, $2.03 in 1997 and $2.00 in 1996. Abnormal weather in 1998 adversely affected earnings by 20 cents per share, the largest such effect in more than a decade. On an as-reported basis, PP&L Resources lost $3.46 per share of common stock in 1998, versus per share earnings of $1.80 in 1997 and $2.05 in 1996. The following table highlights the major items that impacted earnings for each of these years:
1998 1997 1996 ------- ------- ----- Earnings per share - excluding weather, one-time adjustments and other impacts of restructuring $ 2.07 $ 2.03 $2.00 Weather variances on billed sales (0.20) (0.03) 0.05 One-time adjustments: PUC restructuring charge (See Note 4) (5.56) FERC municipalities settlement (See Note 4) (0.19) Windfall profits tax (See Note 10) (0.23) SER settlement 0.11 U.K. tax rate reduction 0.06 0.06 Penn Fuel Gas acquisition costs 0.03 (0.03) Other impacts of restructuring 0.22 ------ ------ ----- Earnings per share - reported $(3.46) $ 1.80 $2.05 ====== ====== =====
Earnings in 1998 were negatively impacted by $948 million of after-tax charges related to the settlement of PP&L's restructuring case before the PUC and another competition-related case before FERC. Several one-time adjustments helped earnings, including a reduction in U.K. corporate income tax rates, a change in the accounting treatment of Penn Fuel Gas acquisition costs and $30 million in proceeds from a settlement with SER regarding a contract dispute over the power purchase costs. The PUC restructuring adjustments also provided a favorable impact of about 22 cents per share on third and fourth quarter earnings of 1998. These adjustments included lower depreciation on impaired generation assets, reduced accruals for taxes other than income and a regulatory adjustment to the accounting for unbilled revenues. These favorable impacts were partially offset by the direct expensing of costs of computer software identified as impaired as part of the restructuring accounting adjustments. After eliminating the effects of these adjustments, 1998 earnings improved by four cents per share over 1997. This earnings improvement reflects higher weather-normalized sales in all customer classes, particularly in the third and fourth quarters of 1998. Weather-adjusted delivery sales to customers in central and eastern Pennsylvania were 2.9% higher in 1998 than in 1997. Earnings were also favorably affected by increased wholesale electricity revenues. These earnings improvements were partially offset by higher operating expenses incurred in 1998 over 1997. This increase reflects higher costs associated with computer information systems, and additional payroll, consultant services and other expenses to meet the requirements of retail competition. Increased firm transmission costs related to the Energy Marketing Center activities and a higher provision for uncollectible customer accounts also increased operating expenses. Adjusted 1997 earnings were three cents per share higher than in 1996. This earnings improvement was attributable to higher revenues from bulk power sales and trading activity of the Energy Marketing Center, which helped offset the impact of the phase-down of contractual sales to JCP&L. Earnings also benefited from refinancing activities and, excluding one-time adjustments, the on-going operations of PP&L Global. The reduction in contractual bulk power sales to JCP&L and other major utilities will continue to adversely impact earnings over the next few years. However, the Energy Marketing Center will resell this returning electric energy and capacity on the open market, along with its other energy trading activities, in an effort to offset the loss in revenues from declining contractual sales. ELECTRIC ENERGY SALES Electricity sales for 1998, 1997 and 1996 were as follows:
1998 1997 1996 ------ ----------------- ------ (Millions of kWh) Electricity delivered to retail customers by PP&L (a) 32,137 31,964 32,307 Less: Electricity supplied during pilot by others 1,999 65 ------ ------ ------ Electricity supplied to retail customers by PP&L 30,138 31,899 32,307 Electricity supplied to retail customers by PP&L EnergyPlus during the pilot 1,507 ------ ------ ------ Total electricity supplied to retail customers (a) 31,645 31,899 32,307 Wholesale Energy Sales 36,706 21,454 14,340
(a) kWh for customers residing in PP&L's service territory who are receiving energy from PP&L or PP&L EnergyPlus will be reflected in both of these categories. Under Pennsylvania's competition pilot program, customers were allowed to choose the supplier of their electricity in 1998. Pilot customers continued to have the utility that served their territory deliver electricity from the supplier of choice. "Electricity delivered to retail customers by PP&L" is the amount of electricity delivered by PP&L to customers in its service territory. "Electricity supplied to retail customers by PP&L" represents the amount of electricity supplied to PP&L service territory customers who did not participate in the pilot program. "Electricity supplied to retail customers by PP&L EnergyPlus" is electricity supplied to customers within and outside PP&L service territory who participated in the pilot program and chose PP&L EnergyPlus as their energy supplier. Electricity delivered to retail customers increased by 173 million kWh, or 0.5%, from the comparable period in 1997. If normal weather had been experienced in 1998 and 1997, deliveries would have increased by 2.9%. This increase is attributable to strong third and fourth quarter deliveries to all customer classes. Electricity delivered decreased by 343 million kWh, or 1.1%, in 1997 from 1996. However, if normal weather had been experienced, deliveries in 1997 would have increased by 0.2%. Total electricity supplied to retail customers has decreased for the past two years. This decrease was due to milder weather in both 1998 and 1997 as compared to 1996, as well as the impact of the competition pilot program. The increase in wholesale energy sales, which includes sales to other utilities and energy marketers through contracts, spot market transactions or power pool arrangements, was primarily the result of increased activity of the Energy Marketing Center. See "Operating Revenues: Wholesale Energy Marketing and Trading Activities" for more information. PP&L Resources has established growth in its generation capability, along with expansion of its energy marketing operations, as a key element of its business strategy. In addition to the current generating assets of PP&L and the announced acquisitions and developments of PP&L Global discussed in Item 1 "BUSINESS-Background," PP&L Resources plans to add another 7,500 mW of generation within the next five years. ENERGY MARKETING AND TRADING ACTIVITIES PP&L, through its Energy Marketing Center, purchases and sells electric capacity and energy at the wholesale level under its FERC market-based tariff. PP&L has entered into agreements to sell firm capacity or energy under its market-based tariff to certain entities located inside and outside of the PJM power pool. PP&L enters into these agreements to market available energy and capacity from its generating assets and to profit from market price fluctuations. If PP&L was unable to meet its obligations under these agreements to sell firm capacity and energy, under certain circumstances it would be required to pay damages equal to the difference between the market price to acquire replacement capacity or energy and the contract price of the undelivered capacity or energy. Depending on price volatility in the wholesale energy markets, such damages could be material. Events that could affect PP&L's ability to meet its firm capacity or energy obligations or cause significant increases in the market price of replacement capacity and energy include the occurrence of extreme weather conditions, unplanned generating plant outages, transmission disruptions, non-performance by counterparties (or their counterparties) with which it has power contracts and other factors affecting the wholesale energy markets. Although PP&L attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty non-performance in the future. PP&L's efforts to mitigate risks associated with open contract positions include maintaining generation capacity to deliver electricity to satisfy its net firm sales contracts and purchasing firm transmission service. In addition, the Energy Marketing Center adheres to the Company's risk management policy and programs, including established credit policies in evaluating counterparty credit risk. PP&L has not experienced any material losses due to non- performance by counterparties to date. During 1998, the Energy Marketing Center entered into commodity forward and option contracts for the physical purchase and sale of energy; these transactions were reflected in the financial statements under the accrual method of accounting. As of January 1, 1999, PP&L adopted mark-to-market accounting for energy contracts entered into for trading purposes, in accordance with EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" and, as a result, recognized a $6.0 million after-tax credit to energy purchases. Under mark-to-market accounting, gains and losses that result from changes in the market prices on contracts entered into for trading purposes will be reflected in current earnings. For purposes of EITF 98-10, energy trading activities refer to energy contracts entered into with the objective of generating profits on or from exposure to shifts or changes in market prices, and risk management activities refer to energy contracts that are designated as and effective as hedges of non-trading activities (i.e., marketing available capacity and energy and purchasing fuel for consumption). PP&L will continue to use accrual accounting for energy contracts that are hedges of non-trading activities until it adopts SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which it expects will occur effective January 1, 2000. SFAS 133, which expands the definition of a derivative to include most of PP&L's commodity contracts that require physical delivery, requires that an entity recognize all derivatives in the statement of financial position at fair value. The accounting for changes in the fair value of a derivative will depend on the intended use of the derivative and the resulting designation. MARKET RISK SENSITIVE INSTRUMENTS Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- PP&L Resources actively manages the market risk inherent in its commodity, debt, foreign currency and equity positions. The Board of Directors of PP&L Resources has adopted a risk management policy to manage the risk exposures related to energy prices, interest rates and foreign currency exchange rates. The policy establishes a Risk Management Committee comprised of certain executive officers which oversees the risk management function. Nonetheless, adverse changes in commodity prices, interest rates, foreign currency exchange rates and equity prices may result in losses in earnings, cash flows and/or fair values. The forward-looking information presented below provides only estimates of what may occur in the future, assuming certain adverse market conditions, due to reliance on model assumptions. As a result, actual future results may differ materially from those presented. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. Commodity Price Risk - Energy Marketing Center ---------------------------------------------- PP&L's risk management program is designed to manage the risks associated with market fluctuations in the price of electricity, natural gas, oil and emission allowances. The Company's risk management policy and programs include risk identification, risk limits management with measurement and controls for real time risk monitoring. In 1998, PP&L entered into fixed-price forward and option contracts that required physical delivery of the commodity. In 1999, PP&L expects to continue to use such contracts as well as other contracts, such as futures and options that could be settled either in cash or by physical delivery of the underlying commodity; exchange-for-physical transactions; and over-the-counter contracts, such as swap agreements where settlement is generally based on the difference between a fixed and index-based price for the underlying commodity, and tolling, reverse tolling, or other contractual arrangements. PP&L enters into contracts to hedge the impact of market fluctuations on its energy-related assets, liabilities, and other contractual arrangements. In addition, as defined by EITF 98-10, PP&L enters into these contracts for trading purposes to take advantage of market opportunities. PP&L may at times create a net open position in its portfolio that could result in material losses if prices do not move in the manner or direction anticipated. PP&L uses various methodologies to simulate forward price curves in the energy markets to estimate the size and probability of changes in market value resulting from commodity price movements. The methodologies require several key assumptions, including selection of confidence levels, the holding period of the commodity positions, and the depth and applicability to future periods of historical commodity price information. As of December 31, 1998, PP&L estimated that a 10% decline in market prices across all geographic areas and time periods could have adversely changed the value of PP&L's trading portfolio by approximately $16 million. For PP&L's non-trading portfolio, a 10% decline in market prices across all geographic areas and time periods could have positively changed the value of PP&L's non-trading portfolio by $17 million; however, this would be offset by the decline in the value of the underlying commodity, the electricity generated. In addition to commodity price risk, PP&L's commodity positions are also subject to operational and event risks including, among others, increases in load demand and forced outages at generating plants. Beginning in October 1998, the PJM ISO established capacity auctions to increase price transparency and liquidity. PP&L expects to participate fully in this capacity market and will apply its existing risk management policies and procedures to its capacity transactions. In the future, capacity is expected to evolve into an actively traded commodity, similar to electricity. Commodity Price Risk - PP&L EnergyPlus -------------------------------------- PP&L EnergyPlus was created in September 1998 as a retail marketing subsidiary of PP&L. During 1998, PP&L EnergyPlus entered into various arrangements, effective in 1999, with retail customers who elect to shop for an energy provider. These contracts commit PP&L EnergyPlus to the sale of electricity or natural gas without a specified firm volume. The longest sales contract extends for three years. To hedge the price risk of these transactions, PP&L EnergyPlus has entered into forward purchase contracts and has the ability to supply the electricity through an option contract with the Energy Marketing Center. Therefore, the potential for near-term losses associated with PP&L EnergyPlus' commodity position is immaterial. Interest Rate Risk ------------------ As a result of deregulation and the new competitive environment, PP&L is exposed to increased interest rate risk. In addition, PP&L Resources has issued debt to finance unregulated energy investments, which also increases interest rate risk. PP&L Resources plans to manage its interest expense risk by using financial derivative products to adjust the mix of fixed and floating rate interest rates in its debt portfolio, adjust the duration of its debt portfolio and lock in U.S. treasury rates in anticipation of future financing, when appropriate. Risk limits were developed using value at risk methodology and are designed to balance risk exposure to volatility in interest expense and losses in the fair value of PP&L Resources' long-term fixed rate debt due to changes in the absolute level of interest rates. As of December 31, 1998, PP&L Resources had no financial derivative instruments outstanding. PP&L Resources is also exposed to changes in earnings and cash flows as a result of changes in interest rates for commercial paper and other short-term debt. At December 31, 1998, PP&L Resources' potential annual maximum exposure to increased interest expense due to an increase in interest rates over a 30-day period, based on a confidence level of 97.5%, was estimated at $4.5 million. This amount has been determined by considering the impact of a hypothetical increase in interest rates on the company's commercial paper and other short- term debt balances as of December 31, 1998. Historically, there is a 97.5% probability that interest rates for commercial paper and other short-term debt will not increase more than 50 basis points over a 30-day period. PP&L Resources is also exposed to changes in the fair value of its long- term, fixed rate debt. At December 31, 1998, PP&L Resources estimated its potential maximum exposure to a change in the fair value of its long-term fixed rate debt through an adverse movement in interest rates over a one-day period, based on a confidence level of 97.5%, at $22 million. Historically, there is a 97.5% probability that fixed interest rates will not increase more than 13 basis points over a one-day period. Market events that are inconsistent with historical trends could cause actual results to exceed estimated levels. Foreign Operations Risk ----------------------- PP&L Global has investments in several international operations, most of which are joint ventures. At December 31, 1998, PP&L Global had investments of $671 million. These investments are primarily energy-related distribution facilities. PP&L Global is exposed to foreign currency risk primarily through investments in affiliates in Latin America and Europe. PP&L Resources has adopted a foreign currency risk management program that is designed to limit or hedge future cross-border cash flows for firm transactions and commitments and to hedge economic exposures such as anticipated dividends and projected asset sales or acquisitions when there is a high degree of certainty that the exposure will be realized. As of December 31, 1998, PP&L Resources did not incur any significant foreign currency-based financing. As of December 31, 1998, PP&L Resources was party to two forward contracts to hedge the foreign currency exchange risk associated with dividends declared but not yet received. PP&L will exchange 16 million British pounds sterling (BPS) for approximately $27 million on March 31, 1999, based on a contractual exchange rate of $1.654/BPS. On January 22, 1999, PP&L Resources exchanged 359 million Chilean pesos (ChP) for $0.7 million, based on a contractual exchange rate of $.00195/ChP. The fair value of these contracts at December 31, 1998, was immaterial. Nuclear Decommissioning Fund - Securities Price Risk ---------------------------------------------------- PP&L maintains trust funds, as required by the NRC, to fund certain costs of decommissioning Susquehanna. As of December 31, 1998, these funds were invested primarily in domestic equity securities and fixed rate, fixed income securities and are reflected at fair value on the Consolidated Balance Sheet. The mix of securities is designed to provide returns to be used to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the value of fixed rate, fixed income securities are exposed to changes in interest rates. PP&L actively monitors the investment performance and periodically reviews asset allocation in accordance with PP&L's nuclear decommissioning trust policy statement. A hypothetical 10% increase in interest rates and 10% decrease in equity prices would result in a $13.7 million reduction in the fair value of the trust assets. PP&L's restructuring settlement agreement provides for the collection of authorized nuclear decommissioning costs through the CTC. Additionally, PP&L is permitted to seek recovery from customers of up to 96% of any increases in these costs. Therefore, PP&L securities price risk is expected to remain immaterial. OPERATING REVENUES: ELECTRIC OPERATIONS The increase (decrease) in revenues from electric operations was attributable to the following:
1998 vs 1997 1997 VS 1996 ------------- ------------- (Millions of Dollars) Retail Electric Revenues Weather effect $(63) $(30) Sales volume and sales mix effect 67 (1) Unbilled revenues 10 16 Pilot shopping credit above market price (14) Other, net 7 9 Energy revenues (29) Other Electric Revenues 6 4 ---- ---- $ 13 $(31) ==== ====
Operating revenues for electric operations increased by $13 million in 1998 over 1997. During the third quarter of 1998, PP&L recognized increased revenues of $23 million due to the impact on unbilled revenue resulting from a change in the regulatory treatment of energy costs. Excluding this benefit and the effects of milder than normal weather experienced in 1998, revenues from electric operations would have increased by $53 million. This revenue increase can be attributed to strong retail electric sales in the third and fourth quarters of 1998. Excluding the effects of weather, electricity delivered to retail customers increased for all customer classes, 2.9% in total, in 1998 over 1997. Operating revenues decreased by $31 million in 1997 from 1996. Revenues from service area sales in 1997 were slightly lower than 1996. The decrease was attributable to mild weather in 1997 and a change in the regulatory treatment of energy costs by the PUC. For 1997 and 1998 underrecovered energy costs (up to a cap of $31.5 million annually) were not recorded as energy revenues, but as regulatory credits, which offset "Other Operating Expenses." Operating Revenues: Wholesale Energy Marketing and Trading Activities The increase (decrease) in revenues from wholesale energy marketing and trading activities was attributable to the following:
1998 VS 1997 1997 vs 1996 ------------- ------------- (Millions of Dollars) Bilateral sales $496 $183 PJM 63 17 Cost-based contracts (45) (27) Oil & gas sales 62 Other (3) (4) ---- ---- $573 $169 ==== ====
Revenues from wholesale energy marketing and trading activities increased by $573 million in 1998 and $169 million in 1997 when compared to the prior years. Revenues have continued to increase despite the phase-down of the capacity and energy agreement with JCP&L and the end of the capacity and energy agreement with Atlantic in March of 1998. This increase in revenues reflects PP&L's continued emphasis on competing in wholesale markets. Energy purchases have also increased to meet these increased sales. Refer to "Energy Purchases" for more information. During 1998, the national energy trading market experienced high prices and increased volatility. PP&L is actively managing its portfolio to attempt to capture the opportunities and limit its exposure to these volatile prices. Refer to "Energy Marketing and Trading Activities" for more information. PUC RESTRUCTURING PROCEEDING Refer to Financial Note 3 to Financial Statements for information regarding the PUC restructuring proceeding. COST OF ELECTRIC FUEL Electric fuel expense increased by $14 million in 1998 when compared to 1997. This reflects increased generation at the coal and oil/gas-fired stations. These units, particularly Martins Creek, were needed as a result of increased wholesale energy marketing and trading activities of the Energy Marketing Center. This increase was partially offset by lower fuel prices for all units, especially oil/gas-fired stations. Fuel expense for 1997 increased by $18 million from 1996. This increase was primarily due to PP&L's coal-fired units operating at higher output to support increased wholesale electric market activity. The increase was slightly offset by a decrease in the unit fuel prices for coal-fired and gas-fired generation. ENERGY PURCHASES Energy purchases increased by $556 million in 1998 when compared to 1997. The increase was primarily due to greater quantities of energy purchased to meet the increased wholesale energy marketing and trading activities of the Energy Marketing Center, which includes increased purchases of natural gas and capacity for resale. The related sales are included in wholesale energy sales. The overall market price of purchased power has also been higher during 1998 compared to 1997 due to market volatility. Energy purchases in 1997 increased by $152 million over 1996. This increase was primarily due to increased marketing and trading activities of the Energy Marketing Center. Higher overall market prices of power during 1997 compared to 1996 contributed to the increase in purchased power costs. POWER PLANT OPERATIONS In an effort to reduce operating costs and position itself for the competitive marketplace, PP&L in August 1998, announced the closing of its Holtwood coal-fired generating station, effective May 1, 1999. The adjacent hydroelectric plant will continue to operate. PP&L also announced its intention to sell its Sunbury coal-fired generating station in 1999. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses in 1998 decreased by $47 million from 1997. This decrease reflects the write-down of impaired generation-related assets in connection with the restructuring adjustments recorded in June 1998. See Note 4 to Financial Statements for additional information. Depreciation and amortization expenses in 1997 increased by $10 million from 1996. This increase was primarily due to depreciation on plant additions and amortization of newly implemented computer software. OTHER OPERATION AND MAINTENANCE EXPENSES Other operation and maintenance expenses increased by $90 million from 1997 to 1998. This increase reflects higher costs associated with computer information systems, and additional payroll, consultant services and other expenses to meet the requirements of retail competition. This increase also reflects additional software expenses, increased firm transmission costs related to the Energy Marketing Center activities and higher provisions for uncollectible customer accounts. Operation and maintenance costs of Penn Fuel Gas, which was acquired in 1998, also added to the increase. These increases were partially offset by credits recorded in connection with the competition pilot program. The PUC has authorized PP&L to seek future recovery of the revenue lost in the pilot program. PP&L has established a regulatory asset for the excess of the shopping credits provided to pilot customers over the market price of this energy. These credits totaled $14 million in 1998, and were recorded as offsets to "Other Operating Expense." Other operation and maintenance expenses in 1997 decreased by $25 million from 1996. Excluding the effect of underrecovered energy costs, operation and maintenance expenses increased by $7 million in 1997. These increases were primarily due to costs associated with the pilot program, the PUC restructuring filing and the FERC transmission access filing. Prior to 1997, underrecovered energy costs were accrued as energy revenues. In 1997 and 1998, these underrecovered costs were recorded as regulatory credits (up to a PUC-mandated cap of $31.5 million), which are reflected in the income statement as a reduction of "Other Operating Expense." This reflects a change in the regulatory treatment of undercollected energy costs by the PUC. See Note 1 to Financial Statements. OTHER INCOME AND (DEDUCTIONS) Other income of PP&L Resources increased by $94 million from 1997 to 1998. This increase was primarily attributed to two one-time adjustments in 1998 and 1997. PP&L's earnings for 1998 reflect a $30 million, or 11 cents per share, recovery from SER as a result of a settlement agreement. This settlement agreement resolved disputes concerning the prices PP&L paid for power purchased from SER since 1990. Conversely, 1997 earnings included a one-time $37 million, or 23 cents per share, charge for the U.K. windfall profits tax on privatized utilities which affected PP&L Global's SWEB investment. The tax has been paid in full. The accounting treatment of Penn Fuel Gas acquisition costs also contributed to the change in other income from 1997 to 1998. The acquisition was originally contemplated as a pooling of interests, and estimated transaction costs of about $6 million were charged against earnings in the third quarter of 1997. The transaction was ultimately recorded under purchase accounting, and the transaction costs were capitalized as part of the investment. Third quarter 1998 earnings were credited by $6 million due to this change. Other income and deductions for 1997 decreased by $49 million from 1996. This decrease was primarily due to the windfall profits tax, as well as the initial expensing of Penn Fuel Gas acquisition costs. FINANCING COSTS PP&L Resources reduced its long-term financing costs during the past few years by retiring long-term debt with the proceeds from the sale of securities at a lower cost and by repurchasing PP&L preferred stock. Interest on long-term debt and dividends on preferred stock decreased from $241 million in 1995 to $228 million in 1998, for a total decrease of $13 million. Interest on short- term debt, net of capitalized interest and AFUDC borrowed funds, increased from $12 million in 1995 to $27 million in 1998. This increase reflects PP&L Capital Funding's commercial paper program initiated in 1998. INCOME TAXES Income tax expense for 1998 increased by $22 million, or 9.3%, from 1997. This was primarily due to an increase in pre-tax book income of $106 million. Income tax expense for 1997 decreased by $17 million, or 6.7%, from 1996. This was primarily due to a decrease in pre-tax book income of $54 million. FINANCIAL CONDITION ------------------- CAPITAL EXPENDITURE REQUIREMENTS The schedule below shows PP&L's current capital expenditure projections for the years 1999-2003 and actual spending for the year 1998. PP&L'S CAPITAL EXPENDITURE REQUIREMENTS
ACTUAL -------------PROJECTED------------- 1998 1999 2000 2001 2002 2003 (Millions of Dollars) Construction expenditures Generating facilities $ 91 $ 97 $117 $125 $104 $ 93 Transmission and distribution facilities 102 110 123 125 125 135 Environmental 6 13 2 2 42 71 Other 44 26 19 19 18 17 ---- ---- ---- ---- ---- ---- Total Construction Expenditures 243 246 261 271 289 316 Nuclear fuel owned and leased 55 47 63 65 67 68 Other leased property 26 21 21 21 21 21 ---- ---- ---- ---- ---- ---- Total Capital Expen- ditures $324 $314 $345 $357 $377 $405 ==== ==== ==== ==== ==== ====
Construction expenditures include AFUDC and Capitalized Interest which are expected to be less than $9.5 million in each of the years 1999-2003. PP&L's capital expenditure projections for the years 1999-2003 total about $1.8 billion. Capital expenditure plans are revised from time to time to reflect changes in conditions. PP&L GLOBAL UNREGULATED INVESTMENTS PP&L Global continues to pursue opportunities to develop and acquire electric generation, transmission and distribution facilities in the United States and abroad. As of December 31, 1998, PP&L Global had investments of $671 million in distribution, transmission and generation facilities in the U.K., Bolivia, Peru, Argentina, Brazil, Spain, Portugal, Chile and El Salvador. PP&L Global's major investments to date are SWEB, Emel and DelSur. In 1998, PP&L Global acquired an additional 1,813,000 shares of Emel at a cost of approximately $32 million, increasing its ownership interest to 37.5%. In February 1998, PP&L Global and Emel acquired a 75% interest in DelSur, an electric distribution company serving 193,000 customers in El Salvador, for approximately $180 million. Under the purchase agreement, PP&L Global directly acquired 37.5% of DelSur and Emel acquired the other 37.5%. Subsequently, PP&L Global and Emel acquired an additional 925,000 shares at a cost of approximately $10.3 million, increasing their ownership interest to 80.45%. DelSur is one of five electricity distribution companies in El Salvador that were privatized by the government. In June 1998, PP&L Global acquired an additional 26% interest in SWEB for $170 million, increasing its equity interest to 51% and its voting interest to 49%. In September 1998, PP&L Global announced an agreement to acquire most of Bangor Hydro-Electric Company's generating assets and certain transmission rights. PP&L Global will purchase 100 percent of Bangor Hydro's hydroelectric assets and certain transmission rights, as well as its interest in an oil-fired generation facility, for $89 million. The acquisition has been approved by the Maine Public Utilities Commission, and remains subject to the approval of the FERC as well as certain third-party consents, which are expected in 1999. PP&L Global has signed definitive agreements with Montana Power Company, Portland General Electric Company and Puget Sound Energy, Inc. to acquire 13 Montana power plants, with 2,614 MW of generating capacity, for a purchase price of $1.586 billion. The acquisition is subject to several conditions, including the receipt of required state and federal regulatory approvals and third-party consents. In this regard, PacifiCorp, a co-owner of Colstrip Units 3 and 4, has a right of first refusal to purchase a portion of the assets of these Units. PP&L Global expects to complete the acquisition by the end of 1999. About 65% of the acquisition cost is expected to be financed on a project credit basis, non-recourse to PP&L Global and PP&L Resources. The balance of the acquisition cost is expected to be financed through a combination of debt and equity issued by PP&L Resources, or with funds that PP&L Resources derives from PP&L's securitization of transition costs. The agreements also provide for PP&L Global's acquisition of related transmission assets for $182 million, subject to certain conditions, including federal regulatory approval. ACQUISITIONS In 1998, PP&L Resources acquired Penn Fuel Gas which, together with its subsidiaries, specializes in natural gas distribution, transmission and storage services and the sale of propane. The transaction was treated as a purchase for accounting and financial reporting purposes. PP&L Resources issued approximately 5.6 million shares of common stock, with a value of approximately $135 million, to acquire all Penn Fuel Gas common and preferred stock. Under the terms of the merger agreement, shareowners of Penn Fuel Gas received 6.968 common shares of PP&L Resources for each common share of Penn Fuel Gas that they owned and 0.682 common shares of PP&L Resources for each preferred share of Penn Fuel Gas that they owned. In 1998, PP&L Resources also acquired H.T. Lyons and McClure, mechanical contractor and engineering firms, in cash transactions for amounts that were not material. In February 1999, PP&L acquired McCarl's, another mechanical contractor and engineering firm, in a cash transaction for an amount that was not material. FINANCING AND LIQUIDITY PP&L Resources' net cash provided by operating activities decreased by $140 million in 1998 compared with 1997. This decrease was primarily due to the decline in net income when adjusted for the impact of certain non-cash items. Earnings in 1998 benefited from lower depreciation, higher equity earnings of unconsolidated affiliates, regulatory credits and other non-cash transactions. Net cash provided by operating activities decreased by $16 million from 1996 to 1997. Net cash used in PP&L Resources' investing activities was $194 million higher in 1998 than 1997. This increase was primarily due to PP&L Global's increased investment in electric energy projects, including its additional investment in SWEB. Net cash used in investing activities was $141 million lower in 1997 compared with 1996. This decrease was primarily due to lower construction expenditures by PP&L, liquidation of subsidiaries' long-term investments to make funds available for other investing and financing activities, and a reduction in the amount of equity funds invested by PP&L Global. Net cash used in PP&L Resources' financing activities was $530 million lower in 1998 than 1997. This reflects a $487 million increase in short-term debt in 1998. This short-term financing helped to fund PP&L Resources' $419 million stock repurchase, and PP&L Global's additional investments. Net cash used in financing activities in 1997 was $257 million higher than in 1996. This was primarily due to PP&L Resources' purchase of PP&L preferred stock at a cost of $380 million, and the retirement of $210 million of long-term debt. These outflows were partially offset by PP&L's issuance of $250 million of preferred securities through PP&L Capital Trust and PP&L Capital Trust II. From 1996 through 1998, PP&L Resources issued $722 million of long-term debt. For the same period, PP&L Resources issued $215 million of common stock. Proceeds from these security sales were used, in part, to retire $650 million of long-term debt to lower financing costs. During the years 1996-1998, PP&L also incurred $234 million of obligations under capital leases (primarily nuclear fuel). PP&L Capital Funding provides debt funding for PP&L Resources and its subsidiaries other than PP&L. In order to ensure liquidity, PP&L and PP&L Capital Funding share a joint facility with a group of banks. This joint facility is comprised of a 364-day revolving credit agreement and a five-year revolving credit agreement. In March 1998, the existing 364-day revolving credit agreement was increased from $150 million to $350 million. This increase, when added to the $300 million five-year revolving credit agreement, brought to $650 million the total amount of revolving credit available to PP&L and PP&L Capital Funding under the joint agreement. In November 1998, PP&L, PP&L Capital Funding, and PP&L Resources replaced the existing 364 day facility with an amended and restated 364-day revolving credit arrangement terminating in November 1999. The five-year revolving credit agreement expires in 2002. Separately, in July 1998, PP&L Capital Funding entered into five separate $80 million, 364-day credit facilities with five banks. PP&L Resources guarantees all obligations of PP&L Capital Funding under the foregoing facilities. As of December 31, 1998, no borrowings were outstanding under any revolving credit arrangements. Under the PUC restructuring order of August 27, 1998, PP&L is permitted to issue transition bonds to securitize up to $2.85 billion of its stranded costs. PP&L is planning to pursue such securitization later in 1999. The proceeds will be used by PP&L to retire outstanding debt and to repurchase common stock from PP&L Resources. See Note 9 to Financial Statements for additional financing activities in 1998. FINANCIAL STRATEGY PP&L Resources has developed a financial strategy that is intended to position PP&L Resources for the anticipated future competitive environment after giving effect to the PUC's Final Order, the related restructuring charge on PP&L's books and the collection of CTC revenues during the transition period. In addition to the securitization referenced above, PP&L Resources' financial strategy and goals include: (a) a common stock dividend level based on a targeted payout ratio of 45%- 55% designed to maintain PP&L Resources' future financing flexibility; (b) maintenance of investment grade ratings on the senior debt securities of PP&L Resources and PP&L; and (c) the temporary use of a higher degree of leverage in PP&L Resources' capital structure during the transition period. As the electric utility industry transitions to a competitive environment, PP&L Resources anticipates the potential to achieve long-term returns on shareowner capital that exceed the returns that have been historically permitted in a fully regulated business environment. At the same time, PP&L Resources' business risks are expected to increase, resulting in an increase in the potential volatility in revenue and income streams. As such, PP&L Resources believes that a dividend payout ratio that is significantly lower than the 80%- 90% payout ratio previously experienced by PP&L Resources and the electric utility industry in general is required to better position PP&L Resources to more effectively compete in the energy markets by increasing PP&L Resources' future financing flexibility. Accordingly, effective October 1, 1998, PP&L Resources' quarterly common stock dividend was reduced to $0.25 per share ($1.00 annualized rate) from the previous level of $0.4175 per share ($1.67 annualized rate). In addition to providing an increase in PP&L Resources' future financing flexibility, this dividend action positions PP&L Resources' common stock for potential increased growth in market value by retaining a proportionately higher level of earnings in the business for reinvestment. A reduction in PP&L Resources' permanent capitalization, as well as the temporary increase in leverage, was effected through a tender offer for 17 million shares of its common stock at $24.50 per share, which was financed by PP&L Resources through the use of short-term debt. During the transition period PP&L Resources anticipates using internal cash flows to retire debt, with a corresponding decrease in financial leverage. The short-term debt used by PP&L Resources was made available through the issuance of commercial paper by PP&L Capital Funding. Dividends on common stock are declared at the discretion of the Boards of Directors of PP&L Resources and PP&L. PP&L Resources and PP&L will continue to consider the appropriateness of these dividend levels, taking into account the respective financial positions, results of operations, conditions in the industry and other factors which the respective Boards deem relevant. FINANCIAL INDICATORS The results of 1998, 1997 and 1996 were impacted by extraordinary items, other one-time adjustments and weather. (See "Earnings" for more information.) The following financial indicators for PP&L Resources reflect the elimination of these impacts from earnings, and provide a better measure of the underlying earnings performance of PP&L Resources and its subsidiaries.
1998 1997 1996 ------- ------- ------- Earnings per share, as adjusted $ 2.07 $ 2.03 $ 2.00 Return on average common equity 12.23% 11.82% 12.03% Ratio of pre-tax income to interest charges 3.55 3.55 3.52 Dividends declared per share $1.335 $ 1.67 $ 1.67 Book value per share $17.80 $16.88 $16.37 Ratio of market price per share to book value per share 157% 142% 141%
ENVIRONMENTAL MATTERS Air --- The Clean Air Act deals, in part, with acid rain, attainment of federal ambient ozone standards and toxic air emissions. PP&L has complied with the 1995 Phase I acid rain provisions by installing continuous emission monitors on all units, burning lower sulfur coal and installing low NOx burners on most units. To comply with the year 2000 Phase II acid rain provisions, PP&L plans to purchase lower sulfur coal and use banked or purchased emission allowances instead of installing FGD on its wholly owned units. PP&L has met the 1995 ambient ozone requirements of the Clean Air Act by reducing NOx emissions by nearly 50% through the use of low NOx burners. Further seasonal (i.e., 5 month) NOx reductions to 55% and 75% of 1990 levels for 1999 and 2003, respectively, are specified under the Northeast Ozone Transport Region's Memorandum of Understanding. The DEP has finalized regulations which require PP&L to reduce its ozone seasonal NOx by 57% beginning in 1999. PP&L plans to comply with this reduction with operational initiatives that rely, to a large extent, on the existing low NOx burners. The EPA has finalized new national standards for ambient levels of ground- level ozone and fine particulates. Based in part on the new ozone standard, the EPA has finalized NOx emission limits for 22 states, including Pennsylvania, which in effect require approximately an 80% reduction from the 1990 level in Pennsylvania by May 2003; the state is required by September 1999 to develop plans for implementing this reduction. Pursuant to Section 126 of the Clean Air Act, several Northeast states have petitioned the EPA to find that major sources of NOx emissions, including PP&L's power plants, are significantly contributing to non-attainment in those states. The EPA has proposed to find such contribution and require emissions reductions at those sources if the states in which those sources are located fail to develop plans by September 1999 to implement the proposed 2003 limits. PP&L estimates that compliance with these emissions reduction requirements could require installation of NOx emissions removal systems on PP&L's three largest coal-fired units, at a capital cost of approximately $35 million per unit. The new particulates standard may require further reductions in SO2 and may expand the planned seasonal NOx reductions to year round in the 2010-2012 timeframe. Under the Clean Air Act, the EPA has been studying the health effects of hazardous air emissions from power plants and other sources, in order to determine whether those emissions should be regulated. Recently, the EPA released a technical report of its findings to date. The EPA concluded that mercury is the power plant air toxin of greatest concern, but that more evaluation is needed before it can determine whether regulation of air toxins from fossil fuel plants is necessary. The EPA is now seeking mercury and chlorine sampling and other data from electric generating units, including PP&L's. In addition, the EPA has announced a new enforcement initiative against older coal-fired plants. Several of PP&L's coal-fired plants could fall into this category. These EPA initiatives could result in compliance costs for PP&L in amounts which are not now determinable but which could be material. Expenditures to meet the 2000 acid rain and 1999 NOx reduction requirements are included in the table of projected construction expenditures in the section entitled "Financial Condition - Capital Expenditure Requirements." PP&L currently estimates that additional capital expenditures and operating costs for environmental compliance under the Clean Air Act will be incurred beyond 2002 in amounts which are not now determinable but which could be material. Water and Residual Waste ------------------------ PP&L has installed dry fly ash handling systems at most of its power stations, which reduces waste water discharge. In other cases, PP&L has modified the existing facilities to allow continued operation of the ash basins under a DEP permit. Any groundwater contamination caused by the basins must also be addressed. Groundwater degradation related to fuel oil leakage from underground facilities and seepage from coal refuse disposal areas and coal storage piles has been identified at several PP&L generating stations. Remedial work related to oil leakage is substantially completed at two generating stations. At this time, the only other remedial work being planned is to abate a localized groundwater degradation problem associated with a waste disposal impoundment at the Montour plant. The final NPDES permit for the Montour plant contains stringent limits for iron and chlorine discharges. Depending on the results of a toxic reduction study, additional water treatment facilities or operational changes may be needed at this plant. Capital expenditures through the year 2003 to correct groundwater degradation at fossil-fueled generating stations, and to address waste water control at PP&L facilities are included in the table of construction expenditures in the section entitled "Financial Condition - Capital Expenditure Requirements." In this regard, PP&L currently estimates that $5.5 million of additional capital expenditures may be required in the next four years to close some of the ash basins and address other ash basin issues at various generating plants. Additional capital expenditures could be required beyond the year 2003 in amounts which are not now determinable but which could be material. Actions taken to correct groundwater degradation, to comply with the DEP's regulations and to address waste water control are also expected to result in increased operating costs in amounts which are not now determinable but which could be material. Superfund and Other Remediation ------------------------------- In 1995, PP&L entered into a consent order with the DEP to address a number of sites where PP&L may be liable for remediation of contamination. This may include potential PCB contamination at certain PP&L substations and pole sites; potential contamination at a number of coal gas manufacturing facilities formerly owned and operated by PP&L; and oil or other contamination which may exist at some of PP&L's former generating facilities. As of December 31, 1998, PP&L has completed work on slightly more than half of the sites included in the consent order. In 1996, Penn Fuel Gas entered into a similar consent order with the DEP to address a number of its sites where Penn Fuel Gas may be liable for remediation of contamination. The sites primarily include former coal gas manufacturing facilities. Prior to PP&L Resources acquiring Penn Fuel Gas on August 21, 1998, Penn Fuel Gas had obtained a "no further action" determination from the DEP for two of the 20 sites covered by the order. At December 31, 1998, PP&L had accrued approximately $6 million and Penn Fuel Gas had accrued $15 million, representing the respective amounts PP&L and Penn Fuel Gas can reasonably estimate they will have to spend to remediate sites involving the removal of hazardous or toxic substances, including those covered by each company's consent orders mentioned above. Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in material additional operating costs for PP&L or Penn Fuel Gas, which neither company can estimate at this time. In addition, certain federal and state statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental agencies, such as the EPA and the DEP, to seek compensation from the responsible parties for the lost value of damaged natural resources. The EPA and the DEP may file such compensation claims against the parties, including PP&L or Penn Fuel Gas, held responsible for cleanup of such sites. Such natural resource damage claims against PP&L or Penn Fuel Gas could result in material additional liabilities. General ------- Due to the environmental issues discussed above or other environmental matters, PP&L may be required to modify, replace or cease operating certain facilities to comply with statutes, regulations and actions by regulatory bodies or courts. In this regard, PP&L also may incur capital expenditures, operating expenses and other costs in amounts which are not now determinable but which could be material. INCREASING COMPETITION Background ---------- The electric utility industry has experienced and will continue to experience a significant increase in the level of competition in the energy supply market. PP&L has publicly expressed its support for full customer choice of electricity suppliers for all customer classes. PP&L is actively involved in efforts at both the state and federal levels to encourage a smooth transition to full competition. Pennsylvania Activities ----------------------- Reference is made to Note 3 to Financial Statements for a discussion of the disposition of PP&L's restructuring plan under the Customer Choice Act. In August 1997, the PUC issued an order modifying and approving PP&L's pilot program under the applicable provisions of the Customer Choice Act and PUC guidelines. Retail customers participating in the PP&L and other Pennsylvania utilities' pilot programs began to receive power from their supplier of choice in November 1997. Under its pilot program, approximately 60,000 PP&L residential, commercial and industrial customers chose their electric supplier. PP&L continued to provide all transmission and distribution, customer service and back-up energy supply services to participating customers in its service area. Only those alternative suppliers licensed by the PUC and in compliance with the state tax obligations set forth in the Customer Choice Act could participate in the pilot programs. Approximately 87 suppliers obtained such licenses to participate in the pilot programs. Reference is also made to "PUC Restructuring Proceeding" for a discussion of the settlement approved by the PUC which requires, among other things, that PP&L transfer its retail electric marketing function to a separate, affiliated corporation. In August 1998, PP&L formed a new subsidiary, PP&L EnergyPlus, for this purpose. In September 1998, the PUC approved PP&L EnergyPlus' application to act as a Pennsylvania EGS. This license permits PP&L EnergyPlus to offer retail electric supply to participating customers in PP&L's service territory and in the service territories of other Pennsylvania utilities. In 1999, PP&L EnergyPlus will offer such supply to industrial and commercial customers throughout the state. At this time, PP&L EnergyPlus has determined not to pursue residential customers in the competitive marketplace based on economic considerations. In September 1998, the PUC issued an Order which, in part, directed Pennsylvania utilities which are members of PJM, including PP&L, to offer their installed capacity at a price of $19.72 per kilowatt-year (Capacity Order). PP&L brought an action in the District Court seeking an injunction against the Capacity Order on the basis, among other things, that it attempted to regulate matters within exclusive federal jurisdiction. In October 1998, PP&L entered into a settlement agreement with the PUC under which (i) PP&L will offer to sell capacity credits to EGS's licensed by the PUC at the equivalent of $19.72 per kilowatt-year prior to June 1, 1999 (increasing to $22.41 per kilowatt-year from June 1, 1999 through December 31, 1999) for service to PP&L residential customers; (ii) all PP&L residential customers will be permitted to select an EGS in January 1999; (iii) the PUC will withdraw the Capacity Order as to PP&L; and (iv) PP&L will withdraw its federal court action against the Capacity Order. Federal Activities ------------------ Reference is made to Note 4 to Financial Statements "Accounting for the Effects of Certain Types of Regulation," for a discussion of PP&L's settlement with 15 small utilities. In June 1997, all of the PJM companies except PECO (the PJM Supporting Companies) filed proposals with the FERC to amend the PJM tariff and restructure the PJM pool. PECO filed a separate request with the FERC to amend the PJM tariff. Furthermore, PECO and certain electric marketers submitted significantly different proposals to restructure the PJM pool. In November 1997, the FERC approved, with certain modifications, the PJM Supporting Companies' proposals for transforming the PJM into an ISO. In summary, the FERC order: (i) approved the PJM's open access transmission rates based on geographic zones, but required PJM to file a single PJM system-wide rate proposal by 2002; (ii) accepted the PJM Supporting Companies' methodology to price transmission when the system is congested and to charge these congestion costs to system users in addition to the open access transmission rates, but ordered PJM to file an additional proposal to address concerns raised over price certainty for buyers and sellers during periods of congestion; (iii) determined that the ISO is to operate both the transmission system and the power exchange which provides for the purchase and sale of spot energy within the PJM market; and (iv) accepted the PJM Supporting Companies' proposal regarding mandatory installed capacity obligations for all entities serving firm retail and wholesale load within PJM, but rejected their proposal for allocating the capacity benefits which result from PJM's ability to import power from other regional power pools. The PJM Supporting Companies and numerous other parties have filed requests for amendment and/or rehearing of virtually every portion of the FERC's PJM ISO order. PP&L also has filed its own request for amendment and/or rehearing. The FERC has not yet taken action on these filings. PP&L's primary issue with the FERC's order relates to a requirement that existing wholesale contracts for sales service and transmission service be modified to have the new PJM transmission tariff applied to service under these existing contracts and the requirement that PP&L modify these contracts to ensure that customers are not assessed multiple transmission charges. In an order issued in May 1998, the FERC allowed PP&L to request an increase in the revenue requirement applicable to transmission service over PP&L's transmission facilities to the extent that PP&L has otherwise unrecovered transmission costs as a result of the contract modifications. PP&L filed the proposed increase to its transmission revenue requirement in July 1998. In October 1998, PP&L filed a settlement agreement among the active parties in that proceeding, which was approved by FERC in December 1998. In July 1997, the FERC accepted a new wholesale power tariff that permits PP&L to sell capacity and energy at market-based rates, both inside and outside the PJM area, subject to certain conditions. This tariff allows PP&L to become more active in the wholesale market with utilities and other entities, and removes pricing restrictions which in the past had limited PP&L to charging at or below cost-based rates. In July 1998, the FERC accepted amendments to PP&L's market-based rate tariff that permit PP&L to sell, assign or transfer transmission rights and associated ancillary services. In October 1998, the FERC accepted a proposed amendment to PP&L's market-based rate tariff to permit PP&L to sell electric energy and/or capacity to its affiliates under specified conditions. In September 1998, PP&L filed its EGS Coordination Tariff with the FERC. The EGS Coordination Tariff applies to entities licensed to serve retail electricity customers under the Commonwealth of Pennsylvania's retail access program. The purpose of the EGS Coordination Tariff is to permit PP&L to provide EGS's with certain FERC-jurisdictional services which will facilitate the ability of EGS's to meet their obligations under the PJM Open Access Transmission Tariff and related agreements of the PJM. The FERC accepted the EGS Coordination Tariff for filing in October 1998 but in a later order stated that it would issue a decision holding that the EGS Coordination Tariff did not need to be filed with the FERC. That decision has not yet been issued. In September 1997, PP&L filed a request with the FERC to lower the applicable PP&L revenue requirement currently set forth in the PJM open access transmission tariff. The new revenue requirement results from PP&L's use of the same test year and cost support data used in the PUC restructuring proceeding. PP&L requested that the new revenue requirement take effect on November 1, 1997. In February 1998, the FERC accepted the proposed rates, subject to refund, and set the amount of the decrease in the revenue requirement for hearing. In October 1998, PP&L filed a settlement agreement among the active parties in that proceeding, which was accepted by the FERC in December 1998. Reference is made to "Pennsylvania Activities" above for a discussion of PP&L's new retail electric marketing subsidiary, PP&L EnergyPlus. PP&L EnergyPlus filed an application with the FERC in September 1998 for authority to sell electric energy and capacity at market-based rates, and for authority to sell, assign or transfer transmission rights and associated ancillary services. The FERC accepted PP&L EnergyPlus' application in December 1998. Also, in September 1998, PP&L filed a notification of change in status with the FERC to report PP&L's affiliation with PP&L EnergyPlus. Pursuant to FERC requirements, PP&L has a filed code of conduct governing its relationship with affiliates that engage in the sale and/or transmission of electric energy. YEAR 2000 PP&L Resources and its subsidiaries utilize computer-based systems throughout their businesses. In the year 2000, these systems will face a potentially serious problem with recognizing calendar dates. Without corrective action, the most reasonable worst case scenario regarding Year 2000 issues could result in computer shutdown or erroneous calculations causing operational problems at the generating stations; diminished ability to monitor, control and coordinate generation with the transmission and distribution systems; and adverse impacts on the operation of various monitoring and metering equipment utilized throughout PP&L. A Company-wide Year 2000 coordination committee was formed to raise the awareness of the Year 2000 issue, share information and review the progress towards compliance. A seven-step approach was developed to achieve Year 2000 compliance by assessing and remediating the problem in application software, hardware, plant control systems and devices containing embedded microprocessors. The seven steps in the plan include awareness, inventory, assessment, remediation, testing, implementation, and contingency planning. PP&L Resources has identified and communicated with critical suppliers, such as fuel suppliers, in order to obtain assurances that they are in compliance with Year 2000 issues. The majority of the responses from these parties are favorable, with some responses still being evaluated and followed-up as appropriate. Delivery of electricity is dependent on the overall reliability of the electric grid. PP&L is cooperating and coordinating with the North American Electric Reliability Council and the PJM Interconnection regarding Year 2000 remediation efforts. As of December 31, 1998, PP&L Resources estimates that approximately 75% of mainframe applications that will remain in production have been determined as being Year 2000 compliant. It is anticipated that all mission-critical systems (i.e. mainframe, embedded technologies, and client server applications) will be Year 2000 ready by July 1, 1999 and all systems ready by November 30, 1999. Year 2000 compliant means computer systems or equipment with date-sensitive chips will accurately process date and time data. Year 2000 ready means that the computer systems or equipment with date-sensitive chips can be used on January 1, 2000, and beyond, but are not fully year 2000 compliant. PP&L has basic contingency plans in place to address issues such as blackouts on the electrical grid, cold starts of generating facilities and disaster recovery procedures for the computing environment. PP&L recognizes that additional contingency plans may be necessary and, as part of the seven- step remediation process, continues to work on identifying and developing additional contingency plans that may be needed. In May 1998, the NRC issued a notification requirement under which nuclear utilities are required to inform the NRC, in writing, that they are working to solve the Year 2000 computer problem. In addition, nuclear utilities have until July 1, 1999 to inform the NRC that their computers are Year 2000 compliant/ready or to submit a status report summarizing the on-going work. PP&L filed its written response, detailing its Year 2000 compliance activities, with the NRC in August 1998. In July 1998, the PUC initiated a non-adversarial investigation to be conducted by the Office of Administrative Law Judge "to accurately assess any and all steps taken and proposed to be taken to resolve the Year 2000 compliance issue by all jurisdictional fixed utilities and mission-critical service providers such as the PJM." The PUC required all jurisdictional utilities to file a written response to a list of questions concerning Year 2000 compliance; and that, if mission-critical systems cannot be made Year 2000 compliant on or before March 31, 1999, to file a detailed contingency plan by that date. PP&L filed its written response to these questions in August 1998 and in November 1998 submitted testimony to the PUC that the Company would have its mission-critical systems Year 2000 ready by July 1, 1999 and all systems ready by November 30, 1999. At this time, PP&L has achieved the following completion percentages on the seven steps referenced above for Year 2000 compliance: awareness, 87%; inventory, 97%; assessment, 87%; remediation, 70%; testing, 72%; implementation, 56%; and additional contingency plans (beyond the basic plans referenced above), 16%. Based upon present assessments, PP&L Resources estimates that it will incur approximately $15 million in Year 2000 remediation costs. Through December 31, 1998, PP&L Resources spent approximately $8 million in remediation costs, which included assistance from outside consultants. These costs are being funded through internally generated funds and are being expensed as incurred. (Address and phone number appears here) Thirty South Seventeenth Street Philadelphia, PA 19103-4094 Telephone 215 575 5000 (PricewaterhouseCoopers LLP logo appears here) Report of Independent Accountants - --------------------------------- To the Shareowners and Board of Directors of PP&L Resources, Inc. and to the Shareowner and Board of Directors of PP&L, Inc. In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 101, present fairly, in all material respects, the consolidated financial position of PP&L Resources, Inc. and its subsidiaries ("PP&L Resources") at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 and the consolidated financial position of PP&L, Inc. and its subsidiaries ("PP&L") at December 31, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of management of PP&L Resources and PP&L; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 1, 1999 PP&L Resources, Inc. -------------------- Management's Report on Responsibility for Financial Statements -------------------------------------------------------------- The management of PP&L Resources, Inc. is responsible for the preparation, integrity and objectivity of the consolidated financial statements and all other sections of this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission. In preparing the financial statements, management makes informed estimates and judgments of the expected effects of events and transactions based upon currently available facts and circumstances. Management believes that the financial statements are free of material misstatement and present fairly the financial position, results of operations and cash flows of PP&L Resources. PP&L Resources' consolidated financial statements have been audited by PricewaterhouseCoopers LLP (PricewaterhouseCoopers), independent certified public accountants. PricewaterhouseCoopers' appointment as auditors was previously ratified by the shareowners. Management has made available to PricewaterhouseCoopers all PP&L Resources' financial records and related data, as well as the minutes of shareowners' and directors' meetings. Management believes that all representations made to PricewaterhouseCoopers during its audit were valid and appropriate. PP&L Resources maintains a system of internal control designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The concept of reasonable assurance recognizes that the cost of a system of internal control should not exceed the benefits derived and that there are inherent limitations in the effectiveness of any system of internal control. Fundamental to the control system is the selection and training of qualified personnel, an organizational structure that provides appropriate segregation of duties, the utilization of written policies and procedures and the continual monitoring of the system for compliance. In addition, PP&L Resources maintains an internal auditing program to evaluate PP&L Resources' system of internal control for adequacy, application and compliance. Management considers the internal auditors' and PricewaterhouseCoopers' recommendations concerning its system of internal control and has taken actions which are believed to be cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that PP&L Resources' system of internal control is adequate to accomplish the objectives discussed in this report. The Board of Directors, acting through its Audit and Corporate Responsibility Committee, oversees management's responsibilities in the preparation of the financial statements. In performing this function, the Audit and Corporate Responsibility Committee, which is composed of four independent directors, meets periodically with management, the internal auditors and the independent certified public accountants to review the work of each. The independent certified public accountants and the internal auditors have free access to the Audit and Corporate Responsibility Committee and to the Board of Directors, without management present, to discuss internal accounting control, auditing and financial reporting matters. Management also recognizes its responsibility for fostering a strong ethical climate so that PP&L Resources' affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the business policies and guidelines of PP&L Resources' operating subsidiaries. These policies and guidelines address: the necessity of ensuring open communication within PP&L Resources; potential conflicts of interest; proper procurement activities; compliance with all applicable laws, including those relating to financial disclosure; and the confidentiality of proprietary information. William F. Hecht Chairman, President and Chief Executive Officer John R. Biggar Senior Vice President and Chief Financial Officer PP&L, Inc. ---------- Management's Report on Responsibility for Financial Statements -------------------------------------------------------------- The management of PP&L, Inc. is responsible for the preparation, integrity and objectivity of the consolidated financial statements and all other sections of this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission. In preparing the financial statements, management makes informed estimates and judgments of the expected effects of events and transactions based upon currently available facts and circumstances. Management believes that the financial statements are free of material misstatement and present fairly the financial position, results of operations and cash flows of PP&L. PP&L's consolidated financial statements have been audited by PricewaterhouseCoopers LLP (PricewaterhouseCoopers) independent certified public accountants. PricewaterhouseCoopers' appointment as auditors was previously ratified by the shareowners of PP&L Resources. Management has made available to PricewaterhouseCoopers all PP&L's financial records and related data, as well as the minutes of shareowners' and directors' meetings. Management believes that all representations made to PricewaterhouseCoopers during its audit were valid and appropriate. PP&L maintains a system of internal control designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The concept of reasonable assurance recognizes that the cost of a system of internal control should not exceed the benefits derived and that there are inherent limitations in the effectiveness of any system of internal control. Fundamental to the control system is the selection and training of qualified personnel, an organizational structure that provides appropriate segregation of duties, the utilization of written policies and procedures and the continual monitoring of the system for compliance. In addition, PP&L maintains an internal auditing program to evaluate PP&L's system of internal control for adequacy, application and compliance. Management considers the internal auditors' and PricewaterhouseCoopers' recommendations concerning its system of internal control and has taken actions which are believed to be cost- effective in the circumstances to respond appropriately to these recommendations. Management believes that PP&L's system of internal control is adequate to accomplish the objectives discussed in this report. The Board of Directors, acting through PP&L Resources' Audit and Corporate Responsibility Committee, oversees management's responsibilities in the preparation of the financial statements. In performing this function, the Audit and Corporate Responsibility Committee, which is composed of four independent directors, meets periodically with management, the internal auditors and the independent certified public accountants to review the work of each. The independent certified public accountants and the internal auditors have free access to PP&L Resources' Audit and Corporate Responsibility Committee and to the Board of Directors, without management present, to discuss internal accounting control, auditing and financial reporting matters. Management also recognizes its responsibility for fostering a strong ethical climate so that PP&L's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in PP&L's business policies and guidelines. These policies and guidelines address: the necessity of ensuring open communication within PP&L; potential conflicts of interest; proper procurement activities; compliance with all applicable laws, including those relating to financial disclosure; and the confidentiality of proprietary information. William F. Hecht Chairman, President and Chief Executive Officer John R. Biggar Senior Vice President and Chief Financial Officer
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENT OF INCOME PP&L Resources, Inc. and Subsidiaries (Millions of Dollars, except per share data) 1998 1997 1996 OPERATING REVENUES Electric operations............................................ $ 2,410 $ 2,397 $ 2,428 Gas operations................................................. 35 Wholesale energy marketing and trading activities.............. 1,223 650 481 Energy related businesses (Note 1)............................. 118 30 17 ----------------- ----------------- ----------------- Total Operating Revenues....................................... 3,786 3,077 2,926 ----------------- ----------------- ----------------- OPERATING EXPENSES Operation Cost of electric fuel........................................ 480 466 448 Cost of natural gas and propane.............................. 13 Energy purchases............................................. 1,060 504 352 Other operating.............................................. 605 513 531 Maintenance.................................................... 182 184 191 Depreciation and amortization (Note 1)......................... 338 385 375 Taxes, other than income (Note 6).............................. 188 204 203 Energy related businesses (Note 1)............................. 93 21 16 ----------------- ----------------- ----------------- Total Operating Expenses....................................... 2,959 2,277 2,116 ----------------- ----------------- ----------------- OPERATING INCOME................................................. 827 800 810 ----------------- ----------------- ----------------- Other Income and (Deductions).................................... 66 (28) 21 ----------------- ----------------- ----------------- INCOME BEFORE INTEREST AND INCOME TAXES.......................... 893 772 831 Interest Expense................................................. 230 215 220 ----------------- ----------------- ----------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS............... 663 557 611 Income Taxes (Note 6)............................................ 259 237 254 ----------------- ----------------- ----------------- INCOME BEFORE EXTRAORDINARY ITEMS................................ 404 320 357 Extraordinary Items (net of $666 income taxes) (Note 4)......... (948) ----------------- ----------------- ----------------- INCOME (LOSS) BEFORE DIVIDENDS ON PREFERRED STOCK................ (544) 320 357 Preferred Stock Dividend Requirements............................ 25 24 28 ----------------- ----------------- ----------------- NET INCOME (LOSS)................................................ ($569) $ 296 $ 329 ================= ================= ================= EARNINGS PER SHARE OF COMMON STOCK BASIC AND DILUTED (A): Income Before Extraordinary Items............................ $2.29 $1.80 $2.05 Extraordinary Items (net of tax)............................. (5.75) ----------------- ----------------- ----------------- NET INCOME (LOSS)................................................ ($3.46) $1.80 $2.05 ================= ================= ================= Dividends Declared per Share of Common Stock..................... $1.335 $1.67 $1.67 (a) Based on average number of shares outstanding (thousands).... 164,651 164,550 161,060 See accompanying Notes to Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS PP&L Resources, Inc. and Subsidiaries (Millions of Dollars)
1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) from continuing operations................... ($569) $ 296 $ 329 Extraordinary items (net of income taxes of $666).............. (948) ------------------ ------------------ ------------------ Net income before extraordinary items.......................... 379 296 329 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization................................ 338 385 375 Amortization of property under capital leases................ 58 68 86 Equity in (earnings)/loss of unconsolidated affiliates....... (49) 2 (13) Regulatory debits and credits................................ (61) (36) (10) Deferred income taxes and investment tax credits............. 12 18 Change in current assets and current liabilities Fuel inventories........................................... (9) 11 (14) Other...................................................... (33) (13) (35) Other operating activities -- net............................ 2 46 75 ------------------ ------------------ ------------------ Net cash provided by operating activities................ 637 777 793 ------------------ ------------------ ------------------ CASH FLOWS FROM INVESTING ACTIVITIES Property, plant and equipment expenditures..................... (304) (310) (360) Proceeds from sale of nuclear fuel to trust.................... 54 60 93 Purchases of available-for-sale securities..................... (15) (72) (600) Sales and maturities of available-for-sale securities.......... 70 111 631 Investments in unconsolidated affiliates....................... (306) (152) (201) Purchases and sales of other financial investments - net....... 4 76 Other investing activities - net............................... 12 (4) 5 ------------------ ------------------ ------------------ Net cash used in investing activities.................... (485) (291) (432) ------------------ ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt..................................... 495 111 116 Issuance of common stock....................................... 62 76 77 Purchase of treasury stock..................................... (419) Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent debentures..................................... 250 Retirement of long-term debt................................... (295) (210) (145) Purchase of subsidiary's preferred stock (net of premium and associated costs)........................................ (369) Payments on capital lease obligations.......................... (58) (68) (86) Common and preferred dividends paid............................ (278) (298) (296) Net increase(decrease) in short-term debt...................... 487 (9) 55 Other financing activities - net............................... (1) (20) (1) ------------------ ------------------ ------------------ Net cash used in financing activities.................... (7) (537) (280) ------------------ ------------------ ------------------ NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS............. 145 (51) 81 Cash and Cash Equivalents at Beginning of Period................ 50 101 20 ------------------ ------------------ ------------------ Cash and Cash Equivalents at End of Period...................... $ 195 $ 50 $ 101 ================== ================== ================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of amount capitalized).......................... $ 237 $ 208 $ 213 Income taxes.................................................. $ 248 $ 244 $ 286 See accompanying Notes to Financial Statements.
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, PP&L Resources, Inc. and Subsidiaries (Millions of Dollars)
ASSETS 1998 1997 PROPERTY, PLANT AND EQUIPMENT Electric utility plant in service - net (Note 1) Transmission and distribution....................................................... $2,179 $2,160 Generation.......................................................................... 1,601 4,022 General and intangible.............................................................. 223 232 -------------- -------------- 4,003 6,414 Construction work in progress - at cost............................................... 117 185 Nuclear fuel owned and leased - net................................................... 162 167 -------------- -------------- Electric utility plant - net........................................................ 4,282 6,766 Gas and oil utility plant - net....................................................... 175 30 Other property - net.................................................................. 23 24 -------------- -------------- 4,480 6,820 -------------- -------------- INVESTMENTS Investment in unconsolidated affiliates at equity (Note 1)............................ 688 377 Nuclear plant decommissioning trust fund (Notes 1 and 7).............................. 206 163 Financial investments (Notes 1 and 8)................................................. 1 52 Other (Note 8)........................................................................ 11 13 -------------- -------------- 906 605 -------------- -------------- CURRENT ASSETS Cash and cash equivalents (Note 1).................................................... 195 50 Accounts receivable (less reserve: 1998, $16; 1997, $16) Utility customers................................................................... 173 190 Other............................................................................... 125 48 Unbilled revenues Utility customers................................................................... 106 90 Other............................................................................... 66 37 Fuel, materials and supplies - at average cost........................................ 207 200 Prepayments........................................................................... 15 28 Other................................................................................. 61 52 -------------- -------------- 948 695 -------------- -------------- REGULATORY ASSETS AND OTHER NONCURRENT ASSETS (NOTE 4) Recoverable transition costs.......................................................... 2,819 Other................................................................................. 454 1,365 -------------- -------------- 3,273 1,365 -------------- -------------- $9,607 $9,485 ============== ==============
See accompanying Notes to Financial Statements. LIABILITIES
1998 1997 Capitalization Common equity Common stock......................................................................... $ 2 $ 2 Capital in excess of par value....................................................... 1,866 1,669 Treasury stock....................................................................... (419) Earnings reinvested (Note 4)......................................................... 372 1,164 Capital stock expense and other...................................................... (31) (26) -------------- -------------- 1,790 2,809 -------------- -------------- Preferred stock With sinking fund requirements....................................................... 47 47 Without sinking fund requirements.................................................... 50 50 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures................................................................... 250 250 Long-term debt......................................................................... 2,983 2,585 -------------- -------------- 5,120 5,741 -------------- -------------- CURRENT LIABILITIES Short-term debt (Note 9)............................................................... 636 135 Long-term debt due within one year..................................................... 1 150 Capital lease obligations due within one year.......................................... 59 58 Above market NUG purchases due within one year (Note 4)................................ 105 Accounts payable....................................................................... 197 140 Taxes and interest accrued............................................................. 95 102 Dividends payable...................................................................... 46 76 Other.................................................................................. 128 108 -------------- -------------- 1,267 769 -------------- -------------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES Deferred income taxes and investment tax credits (Note 6).............................. 1,574 2,221 Above market NUG purchases (Note 4).................................................... 775 Capital lease obligations.............................................................. 109 113 Other (Notes 1 and 7)................................................................. 762 641 -------------- -------------- 3,220 2,975 -------------- -------------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)........................................ -------------- -------------- $9,607 $9,485 ============== ==============
See accompanying Notes to Financial Statements. CONSOLIDATED STATEMENT OF SHAREOWNERS' COMMON EQUITY PP&L Resources, Inc. and Subsidiaries (Millions of Dollars)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ------------ ------------ ------------- Common stock at beginning of year............................................ $ 2 $ 2 $ 2 Sale of common stock....................................................... ------------ ------------ ------------- Common stock at end of year.................................................. 2 2 2 ------------ ------------ ------------- Capital in excess of par value at beginning of year.......................... 1,669 1,596 1,513 Common stock issued (b).................................................... 62 76 77 Common stock issued for purchase of Penn Fuel Gas (see Note 11). 135 Other...................................................................... (3) 6 ------------ ------------ ------------- Capital in excess of par value at end of year................................ 1,866 1,669 1,596 ------------ ------------ ------------- Treasury stock at beginning of year.......................................... Purchase of treasury stock................................................. (419) ------------ ------------ ------------- Treasury stock at end of year................................................ (419) ------------ ------------ ------------- Earnings reinvested at beginning of year..................................... 1,164 1,143 1,083 Net income (loss).......................................................... (569) 296 329 Cash dividends declared on common stock.................................... (223) (275) (269) ------------ ------------ ------------- Earnings reinvested at end of year........................................... 372 1,164 1,143 ------------ ------------ ------------- Capital stock expense and other at beginning of year......................... (26) 4 (1) Other...................................................................... (5) (30) 5 ------------ ------------ ------------- Capital stock expense and other at end of year............................... (31) (26) 4 ------------ ------------ ------------- Total Shareowners' Common Equity............................................. $ 1,790 $ 2,809 $ 2,745 ============ ============ ============= Common stock shares at beginning of year (a)................................. 166,248,284 162,665,416 159,403,266 Common stock issued (b).................................................... 2,604,369 3,582,868 3,262,150 Common stock issued for purchase of Penn Fuel Gas.......................... 5,555,522 Common stock purchased..................................................... (16,996,129) ------------ ------------ ------------- Common stock shares at end of year........................................... 157,412,046 166,248,284 162,665,416 ------------ ------------ -------------
(a) $.01 par value, 390,000,000 share authorized. Each share entitles the holder to one vote on any question presented to any shareowners' meeting. (b) Common stock issued through the ESOP and the DRIP. See accompanying Notes to Financial Statements. CONSOLIDATED STATEMENT OF PREFERRED STOCK AT DECEMBER 31, PP&L Resources, Inc. and Subsidiaries (a) (Millions of Dollars)
SHARES OUTSTANDING OUTSTANDING SHARES 1998 1997(b) 1998 (b) AUTHORIZED PP&L PREFERRED STOCK - $100 par, cumulative 4-1/2%........................ $ 25 $ 25 530,189 629,936 Series........................ 72 72 4,133,556 10,000,000 ------- ------- $ 97 $ 97 ======= =======
DETAILS OF PREFERRED STOCK (c)
SINKING FUND OPTIONAL PROVISIONS SHARES REDEMPTION SHARES TO BE OUTSTANDING OUTSTANDING PRICE PER REDEEMED REDEMPTION 1998 (b) 1997 (b) 1998 (b) SHARE ANNUALLY (f) PERIOD With Sinking Fund Requirements Series Preferred 5.95%......................... $ 1 $ 1 300,000 (d) 10,000 April 2001 6.05%......................... 250,000 (d) 6.125%........................ 31 31 1,150,000 (d) (e) 2003-2008 6.15%......................... 10 10 250,000 (d) 100,000 April 2003 6.33%......................... 5 5 1,000,000 (d) 50,000 July 2003 ------------------- $47 $ 47 =================== Without Sinking Fund Requirements 4-1/2% Preferred................ $25 $ 25 530,189 $ 110.00 Series Preferred 3.35%......................... 2 2 41,783 103.50 4.40%......................... 11 11 228,773 102.00 4.60%......................... 3 3 63,000 103.00 6.75%......................... 9 9 850,000 (d) ------------------ $50 $ 50 ==================
INCREASES(DECREASES) IN PREFERRED STOCK There were no issuances or redemptions of preferred stock in 1998, 1997 or 1996. (a) Each share of PP&L's preferred stock entitles the holder to one vote on any question presented to PP&L's shareowners' meetings. There were 10,000,000 shares of PP&L Resources' preferred stock and 5,000,000 shares of PP&L's preference stock authorized; none were outstanding at December 31, 1998 and 1997. (b) In 1997, and continuing in 1998, PP&L Resources acquired 79.11% ($369 million par value) of the outstanding preferred stock of PP&L in a tender offer. At December 31, 1998, these shares have not been retired or redeemed. The par value of PP&L preferred stock acquired by PP&L Resources has been eliminated for purposes of providing consolidated financial statements. (c) The involuntary liquidation price of the preferred stock is $100 per share. The optional voluntary liquidation price is the optional redemption price per share in effect, except for the 4-1/2% Preferred Stock for which such price is $100 per share (plus in each case any unpaid dividends). (d) These series of preferred stock are not redeemable prior to the following years: 5.95%, 2001; 6.05%, 2002; 6.125%, 6.15%, 6.33% and 6.75%, 2003. (e) Shares to be redeemed annually on October 1 as follows: 2003-2007, 57,500; 2008, 22,500. (f) After giving effect to the preferred stock tender offer. See accompanying Notes to Financial Statements. CONSOLIDATED STATEMENT OF COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES AT DECEMBER 31, PP&L Resources, Inc. and Subsidiaries (a) PP&L, Inc. and Subsidiaries (a) (Millions of Dollars)
Outstanding Outstanding 1998 1997 1998 Authorized Maturity (b) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Company Debentures - $25 per security 8.10%............. $ 150 $ 150 6,000,000 6,000,000 July 2002 8.20%............. 100 100 4,000,000 4,000,000 April 2002 ------------- ------------- $ 250 $ 250 ============= =============
(a) In 1997 PP&L arranged for the issuance of a total of $250 million of company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures by PP&L Capital Trust and PP&L Capital Trust II, two Delaware statutory business trusts. These preferred securities are supported by a corresponding amount of junior subordinated deferrable interest debentures issued by PP&L to the trusts. PP&L owns all of the common securities, representing the remaining undivided beneficial ownership interest in the assets of the trusts. The proceeds derived from the issuance of the Preferred Securities and the common securities were used by PP&L Capital Trust and PP&L Capital Trust II to acquire $103 million and $155 million principal amount of Junior Subordinated Deferrable Interest Debentures, ("Subordinated Debentures") respectively. PP&L has guaranteed all of the trusts' obligations under the Preferred Securities. The proceeds of the sale of these preferred securities were loaned by PP&L to PP&L Resources for the tender offer for PP&L preferred stock. (b) The preferred securities are subject to mandatory redemption, in whole or in part, upon the repayment of the Subordinated Debentures at maturity or their earlier redemption. At the option of PP&L, the Subordinated Debentures are redeemable on and after the dates shown above in whole at any time or in part from time to time. The amount of preferred securities subject to such mandatory redemption will be equal to the amount of related Subordinated Debentures maturing or being redeemed. The redemption price is $25 per security plus an amount equal to accumulated and unpaid distributions to the date of redemption. See accompanying Notes to Financial Statements. CONSOLIDATED STATEMENT OF LONG-TERM DEBT AT DECEMBER 31, PP&L Resources, Inc. and Subsidiaries PP&L, Inc. and Subsidiaries (Millions of Dollars)
Outstanding 1998 1997 Maturity(b) First Mortgage Bonds (a) 5-1/2%................................................. $ 150 April 1, 1998 6%..................................................... $ 125 125 June 1, 2000 7-3/4%................................................. 150 150 May 1, 2002 6-7/8%................................................. 100 100 February 1, 2003 6-1/8% to 6-7/8%....................................... 625 (c) 425 2004-2008 7.70%.................................................. 200 200 2009-2013 (d) 7-3/8%................................................. 100 100 2014-2018 6-3/4% to 9-3/8%....................................... 815 815 2019-2023 7.30%.................................................. 150 150 2024-2028 First Mortgage Pollution Control Bonds (a) 6.40% Series H......................................... 90 90 November 1, 2021 5.50% Series I......................................... 53 53 February 15, 2027 6.40% Series J......................................... 116 116 September 1, 2029 6.15% Series K......................................... 55 55 August 1, 2029 ------------------ ----------------- 2,579 2,529 Unsecured promissory notes............................... 116 Pollution Control Revenue Bonds.......................... 9 9 ------------------ ----------------- 2,588 2,654 Unamortized (discount) and premium -- net................ (19) (21) ------------------ ----------------- 2,569 2,633 Less amount due within one year.......................... 150 ------------------ ----------------- Total PP&L long-term debt.................................. 2,569 2,483 ------------------ ----------------- Additional PP&L Resources, Inc. Medium Term Notes 5.75% to 6.84%......................................... 397 (e) 102 2000-2007 Unsecured Promissory Notes............................... 18 ------------------ ----------------- 415 102 Less amount due within one year.......................... 1 ------------------ ----------------- Total PP&L Resources long-term debt...................... $2,983 $2,585 ================== ================= __________________________________________ (a) Substantially all owned electric utility plant is subject to the lien of PP&L's Mortgage. (b) Aggregate long-term debt maturities through 2003 are (millions of dollars): 2000, $235; 2001, $70; 2002, $150; 2003, $185. There are no bonds outstanding that have sinking fund requirements. (c) In May 1998, PP&L issued $200 million First Mortgage Bonds, 6-1/8% Reset Put Securities Series due 2006. In connection with this issuance, PP&L assigned to a third party the option to call the bonds from the holders on May 1, 2001. These bonds will mature on May 1, 2006, but will be required to be surrendered by the existing holders on May 1, 2001 either through the exercise of the call option by the callholder or, if such option is not exercised, through the automatic exercise of a mandatory put by the trustee on behalf of the bondholders. If the call option is exercised, the bonds will be remarketed and the interest rate will be reset for the remainder of their term to the maturity date. If the call option is not exercised, the mandatory put will be exercised and PP&L will be required to repurchase the bonds at 100% of their principal amount on May 1, 2001. Proceeds from the sale of the bonds were used by PP&L to retire $116 million of its unsecured term loans and to reduce its outstanding commercial paper balances. (d) Any registered owner of these bonds has the right to require PP&L to redeem such owner's bonds on October 1, 1999 at a price of 100% of the principal amount. (e) In 1998, PP&L Capital Funding issued $295 million of medium-term notes with maturities varying from two to seven years.
See accompanying Notes to Financial Statements. CONSOLIDATED STATEMENT OF INCOME PP&L, Inc. and Subsidiaries (Millions of Dollars)
1998 1997 1996 OPERATING REVENUES Electric operations........................................ $2,410 $2,397 $2,428 Wholesale energy marketing and trading activities.......... 1,223 650 481 Energy related businesses (Note 1)......................... 10 2 2 ------------------ ------------------ ------------------ Total Operating Revenues................................... 3,643 3,049 2,911 ------------------ ------------------ ------------------ OPERATING EXPENSES Operation Cost of electric fuel.................................... 480 466 448 Energy purchases......................................... 1,060 504 352 Other operating.......................................... 594 513 531 Maintenance................................................ 180 184 191 Depreciation and amortization (Note 1)..................... 335 385 375 Taxes, other than income (Note 6).......................... 185 204 203 Energy related businesses (Note 1)......................... 8 3 2 ------------------ ------------------ ------------------ Total Operating Expenses................................... 2,842 2,259 2,102 ------------------ ------------------ ------------------ OPERATING INCOME............................................. 801 790 809 Other Income................................................. 77 12 17 ------------------ ------------------ ------------------ INCOME BEFORE INTEREST AND INCOME TAXES...................... 878 802 826 Interest Expense............................................. 196 207 214 ------------------ ------------------ ------------------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS........... 682 595 612 Income Taxes (Note 6)........................................ 273 247 255 ------------------ ------------------ ------------------ INCOME BEFORE EXTRAORDINARY ITEMS............................ 409 348 357 Extraordinary Items (net of $666 income taxes) (Note 4)..... (948) ------------------ ------------------ ------------------ NET INCOME(LOSS) BEFORE DIVIDENDS ON PREFERRED STOCK............................................ (539) 348 357 Dividends on Preferred Stock................................. 48 40 28 ------------------ ------------------ ------------------ EARNINGS AVAILABLE TO PP&L RESOURCES, INC.................... ($587) $ 308 $ 329 ================== ================== ================== See accompanying Notes to Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS PP&L, Inc. and Subsidiaries (Millions of Dollars)
1998 1997 1996 Cash Flows From Operating Activities Net income (loss) from continuing operations..................... ($539) $ 348 $ 357 Extraordinary items (net of income taxes of $666)................ (948) ---------------- ----------------- ---------------- Net income before extraordinary items............................ 409 348 357 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization.................................. 335 385 375 Amortization of property under capital leases.................. 58 68 86 Regulatory debits and credits.................................. (61) (36) (10) Deferred income taxes and investment tax credits............... 12 20 (1) Change in current assets and current liabilities Fuel inventories............................................. (8) 11 (14) Other........................................................ 16 (25) (38) Other operating activities -- net.............................. (66) 15 44 ---------------- ---------------- ---------------- Net cash provided by operating activities...................... 695 786 799 ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Property, plant and equipment expenditures...................... (297) (310) (360) Proceeds from sales of nuclear fuel to trust.................... 54 60 93 Purchases of available-for-sale securities...................... (15) (72) (90) Sales and maturities of available-for-sale securities........... 69 88 93 Purchases and sales of other financial investments - net........ 76 Loan to parent.................................................. (375) Other investing activities - net................................ 6 (4) 5 ---------------- ---------------- ---------------- Net cash used in investing activities..................... (183) (537) (259) ---------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt...................................... 200 9 116 Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures..................................... 250 Capital contribution from parent................................ 6 7 32 Retirement of long-term debt.................................... (266) (210) (145) Payments on capital lease obligations........................... (58) (67) (86) Common and preferred dividends paid............................. (412) (344) (296) Net increase (decrease) in short-term debt...................... 35 35 (79) Other financing activities - net................................ (1) (9) (2) ---------------- ---------------- ---------------- Net cash used in financing activities..................... (496) (329) (460) ---------------- ---------------- ---------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 16 (80) 80 Cash and Cash Equivalents at Beginning of Period................ 15 95 15 ---------------- ---------------- ---------------- Cash and Cash Equivalents at End of Period...................... $ 31 $ 15 $ 95 ================ ================ ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of amount capitalized).......................... $ 208 $ 201 $ 208 Income taxes.................................................. $ 261 $ 253 $ 289 See accompanying Notes to Financial Statements.
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, PP&L, Inc. and Subsidiaries (Millions of Dollars)
ASSETS 1998 1997 Property, Plant and Equipment Electric utility plant in service - net (Note 1) Transmission and distribution.............................................. $2,179 $2,160 Generation................................................................. 1,601 4,022 General and intangible..................................................... 223 232 ----------------- ----------------- 4,003 6,414 Construction work in progress - at cost...................................... 117 185 Nuclear fuel owned and leased - net.......................................... 162 167 ----------------- ----------------- Electric utility plant - net................................................ 4,282 6,766 Gas and oil utility plant - net.............................................. 28 30 Other property - net......................................................... 21 24 ----------------- ----------------- 4,331 6,820 ----------------- ----------------- INVESTMENTS Loan to parent............................................................... 429 375 Nuclear plant decommissioning trust fund (Notes 1 and 7)..................... 206 163 Financial investments (Notes 1 and 8)........................................ 1 52 Investment in unconsolidated affiliate at equity (Note 1).................... 17 17 Other (Note 8)............................................................... 12 13 ----------------- ----------------- 665 620 ----------------- ----------------- CURRENT ASSETS Cash and cash equivalents (Note 1)........................................... 31 15 Accounts receivable (less reserve: 1998, $16; 1997, $16) Utility customers.......................................................... 163 188 Other...................................................................... 67 64 Unbilled revenues Utility customers.......................................................... 104 90 Other...................................................................... 61 36 Fuel, materials and supplies - at average cost............................... 196 200 Prepayments.................................................................. 14 26 Other........................................................................ 58 51 ----------------- ----------------- 694 670 ----------------- ----------------- REGULATORY ASSETS AND OTHER NONCURRENT ASSETS (NOTE 4) Recoverable transition costs................................................. 2,819 Other........................................................................ 329 1,362 ----------------- ----------------- 3,148 1,362 ----------------- ----------------- $8,838 $9,472 ================= =================
See accompanying Notes to Financial Statements.
LIABILITIES 1998 1997 CAPITALIZATION Common equity Common stock............................................................... $1,476 $1,476 Additional paid-in capital................................................. 70 64 Earnings reinvested (Note 4)............................................... 210 1,092 Capital stock expense and other............................................ (26) (20) ----------------- ----------------- 1,730 2,612 ----------------- ----------------- Preferred stock With sinking fund requirements............................................. 295 295 Without sinking fund requirements.......................................... 171 171 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures......................................................... 250 250 Long-term debt............................................................... 2,569 2,483 ----------------- ----------------- 5,015 5,811 ----------------- ----------------- CURRENT LIABILITIES Short-term debt (Note 9)..................................................... 80 45 Long-term debt due within one year........................................... 150 Capital lease obligations due within one year................................ 59 58 Above market NUG purchases due within one year (Note 4)...................... 105 Accounts payable............................................................. 189 148 Taxes and interest accrued................................................... 86 99 Dividends payable............................................................ 12 81 Other........................................................................ 114 107 ----------------- ----------------- 645 688 ----------------- ----------------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES Deferred income taxes and investment tax credits (Note 6).................... 1,561 2,221 Above market NUG purchases (Note 4).......................................... 775 Capital lease obligations.................................................... 109 113 Other (Notes 1 and 7)........................................................ 733 639 ----------------- ----------------- 3,178 2,973 ----------------- ----------------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 14) .............................. ----------------- ----------------- $8,838 $9,472 ================= ================= See accompanying Notes to Financial Statements.
CONSOLIDATED STATEMENT OF SHAREOWNER'S COMMON EQUITY PP&L, Inc. and Subsidiaries (Millions of Dollars)
For the Years Ended December 31, ------------------------------------------ 1998 1997 1996 --------- --------- -------- Common stock at beginning of year..................... $ 1,476 $ 1,476 $ 1,476 Sale of common stock................................ --------- --------- -------- Common stock at end of year........................... 1,476 1,476 1,476 --------- --------- -------- Additional paid-in capital at beginning of year....... 64 57 25 Capital contribution from PP&L Resources............ 6 7 32 --------- --------- -------- Additional paid-in capital at end of year............. 70 64 57 --------- --------- -------- Earnings reinvested at beginning of year.............. 1,092 1,094 1,034 Net income (loss)................................... (539) 348 357 Cash dividends declared: Common stock...................................... (295) (310) (269) Preferred stock................................... (48) (40) (28) --------- --------- -------- Earnings reinvested at end of year.................... 210 1,092 1,094 --------- --------- -------- Capital stock expense and other at beginning of year.. (20) (10) (7) Other............................................... (6) (10) (3) --------- --------- -------- Capital stock expense and other at end of year........ (26) (20) (10) --------- --------- -------- Total Shareowner's Common Equity...................... $ 1,730 $ 2,612 $ 2,617 ========= ========= ======== Common stock shares at beginning of year (a).......... 157,300,382 157,300,382 157,300,382 Common stock issued................................. Common stock purchased.............................. ------------ ------------ ----------- Common stock shares at end of year.................... 157,300,382 157,300,382 157,300,382 ------------ ------------ ----------- (a) No par value. 170,000,000 shares authorized. All common shares of PP&L stock are owned by PP&L Resources.
See accompanying Notes to Financial Statements. CONSOLIDATED STATEMENT OF PREFERRED STOCK AT DECEMBER 31, PP&L, Inc. and Subsidiaries(a) (Millions of Dollars)
SHARES OUTSTANDING OUTSTANDING SHARES 1998 1997 1998 AUTHORIZED PREFERRED STOCK -- $100 par, cumulative 4-1/2%....................... $53 $53 530,189 629,936 Series....................... 413 413 4,133,556 10,000,000 ------------- ------------- $466 $466 ============= =============
DETAILS OF PREFERRED STOCK (b)
SINKING FUND OPTIONAL PROVISIONS SHARES REDEMPTION SHARES TO BE OUTSTANDING OUTSTANDING PRICE PER REDEEMED REDEMPTION 1998 1997 1998 SHARE ANNUALLY PERIOD With Sinking Fund Requirements Series Preferred 5.95%......................... $30 $30 300,000 (c) 300,000 April 2001 6.05%......................... 25 25 250,000 (c) 250,000 April 2002 6.125%........................ 115 115 1,150,000 (c) (d) 2003-2008 6.15%......................... 25 25 250,000 (c) 250,000 April 2003 6.33%......................... 100 100 1,000,000 (c) (e) 2003-2008 ------------- ------------- $295 $295 ============= ============= Without Sinking Fund Requirements 4-1/2% Preferred................ $53 $53 530,189 $110.00 Series Preferred 3.35%......................... 4 4 41,783 103.50 4.40%......................... 23 23 228,773 102.00 4.60%......................... 6 6 63,000 103.00 6.75%......................... 85 85 850,000 (c) ------------- ------------- $171 $171 ============= =============
INCREASES (DECREASES) IN PREFERRED STOCK There were no issuances or redemptions of preferred stock in 1998, 1997 or 1996. (a) Each share of PP&L's preferred stock entitles the holder to one vote on any question presented to PP&L's shareowners' meetings. There were 5,000,000 shares of PP&L's preference stock authorized; none were outstanding at December 31, 1998 and 1997, respectively. (b) The involuntary liquidation price of the preferred stock is $100 per share. The optional voluntary liquidation price is the optional redemption price per share in effect, except for the 4-1/2% Preferred Stock for which such price is $100 per share (plus in each case any unpaid dividends). (c) These series of preferred stock are not redeemable prior to the following years: 5.95%, 2001; 6.05%, 2002; 6.125%, 6.15%, 6.33% and 6.75%, 2003. (d) Shares to be redeemed annually on October 1 as follows: 2003-2007, 57,500; 2008, 862,500. (e) Shares to be redeemed annually on July 1 as follows: 2003-2007, 50,000; 2008, 750,000. NOTES TO FINANCIAL STATEMENTS Terms and abbreviations appearing in Notes to Financial Statements are explained in the glossary. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND CONSOLIDATION As of December 31, 1998, PP&L Resources was the parent holding company of PP&L, PP&L Global, PP&L Spectrum, PP&L Capital Funding, Penn Fuel Gas, H.T. Lyons and McClure. The financial condition and results of operations of PP&L and PP&L Global are currently the principal factors affecting PP&L Resources' financial condition and results of operations. PP&L provides electricity delivery service in eastern and central Pennsylvania, sells retail electricity throughout Pennsylvania, and markets wholesale electricity in 28 states and Canada. PP&L Global is an international independent power company. The consolidated financial statements include the accounts of PP&L Resources and its direct and indirect subsidiaries. All significant intercompany transactions have been eliminated. Less than 50% owned affiliates are accounted for using the equity method. These affiliates consist principally of PP&L's investment in Safe Harbor Water Power Corporation and investments held by PP&L Global. All direct and indirect affiliates of PP&L Resources report their results on a current basis, except for PP&L Global. Effective in 1998, PP&L Global records the results of its majority owned affiliates on a one-month lag. PP&L Global records the results of affiliates in which it holds a minority interest on a one-quarter lag. Recording these results on a lag basis allows PP&L Global to close its books in a timely manner to coincide with the closing of PP&L Resources' books. RECLASSIFICATION Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the current presentation. The most significant reclassifications have been made in the Consolidated Statement of Income. This Statement has been modified to better reflect the changing nature of the business from a regulated electric utility to a full- service provider of retail and wholesale energy and related products and services. The operating revenues and expenses of PP&L Global, PP&L Spectrum, McClure, and H.T. Lyons are reflected as "Energy Related Businesses," as components of "Operating Income." Previously, the results of non-regulated affiliates were included in "Other Income and (Deductions)" in PP&L Resources' Statement of Income. In addition, the revenues generated by PP&L's wholesale energy and trading activities are now separately disclosed. Also, income taxes are no longer reflected as "Operating Expense," which was the traditional disclosure used by utilities. Lastly, nuclear decommissioning expense had historically been classified as "Other operating" expense. These expenses have been reclassified as depreciation expense. On the Consolidated Balance Sheet, "Electric utility plant in service - net" at December 31, 1997 has been reclassified to separately disclose generation plant, which is no longer subject to the regulatory accounting provisions of SFAS 71, "Accounting for the Effects of Certain Types of Regulation." See Note 4 for further information. MANAGEMENT'S ESTIMATES These financial statements have been prepared using information which represents management's best estimates of existing conditions. Actual results could differ from these estimates. Significant estimates were required in recording the effect of the PUC restructuring outcome. The impairment write-down of certain generation plant was dependent on projections of future cash flows and capacity factors. Cash flow projections and the resulting impact on the fair value determination of these generating facilities are subject to future re-evaluation. In addition, the liabilities recorded for above-market purchases from NUGs were based on estimated generation by the NUG facilities and estimated future market prices for this generation. Again, these recorded amounts are subject to revision if the underlying estimates change. ACCOUNTING RECORDS The accounting records for PP&L are maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the PUC. REGULATION Historically, PP&L accounted for its operations in accordance with the provisions of SFAS 71, which requires rate-regulated entities to reflect the effects of regulatory decisions in their financial statements. PP&L discontinued application of SFAS 71 for the generation portion of its business effective June 30, 1998. UTILITY PLANT Additions to utility plant and replacement of units of property are capitalized at cost. AFUDC is capitalized as part of the construction costs for regulated projects. Effective June 30, 1998, the recording of AFUDC was discontinued on generation-related construction projects, since these assets are no longer subject to the provisions of SFAS 71. Instead, capitalized interest is recorded on generation-related projects in accordance with SFAS 34, "Capitalizing Interest Costs." The cost of units of depreciable property retired or replaced is charged to accumulated depreciation. Expenditures for maintenance and repairs of property and the cost of replacing items determined to be less than a unit of property are charged to operating expense. The cost to retire depreciable units of generation-related property is charged to operating expense while the cost to retire depreciable units of regulated property is charged to accumulated depreciation. Following are the classes of Electric Utility Plant in Service, with associated accumulated depreciation reserves, at December 31, 1998 and December 31, 1997 (millions of dollars):
Electric Transmission General Utility & & Plant In Distribution Generation Intangible Service ------------- ---------- ---------- -------- December 31, 1998: Original Cost $ 3,395 $ 6,351 $ 383 $10,129 Accumulated Depreciation Reserve (1,216) (4,750) (160) (6,126) ------- ------- ----- ------- $ 2,179 $ 1,601 $ 223 $ 4,003 ======= ======= ===== ======= December 31, 1997: Original Cost $ 3,309 $ 6,306 $ 369 $ 9,984 Accumulated Depreciation Reserve (1,149) (2,284) (137) (3,570) ------- ------- ----- ------- $ 2,160 $ 4,022 $ 232 $ 6,414 ======= ======= ===== =======
Generation plant is reflected at the lower of cost or market value at December 31, 1998. As noted in the "Regulation" section of this note, PP&L discontinued application of SFAS 71 for the generation portion of its business effective June 30, 1998. In accordance with SFAS 101, "Regulated Enterprises- Accounting for the Discontinuation of Application of FASB Statement No. 71," impairment tests were performed on the individual generating facilities. These impairment tests used the provisions of SFAS 121, "Accounting For the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of." As a result, generation plant assets were written down by $2.357 billion in June 1998. The other classes of Electric Utility Plant in Service continue to be subject to SFAS 71 and are carried at historical cost. For financial statement purposes, depreciation is being provided over the estimated useful lives of property using a straight-line method. Certain property at the Susquehanna Station was depreciated at an annual rate of $173 million from October 1995 through December 1998, at which point this certain property was fully depreciated. Provisions for depreciation, as a percent of average depreciable property, approximated 3.7% in 1998, and 3.8% in 1997 and 1996. NUCLEAR DECOMMISSIONING AND FUEL DISPOSAL An annual provision for PP&L's share of the future cost to decommission the Susquehanna station, equal to the amount allowed for ratemaking purposes, is charged to depreciation expense. Such amounts are invested in external trust funds which can be used only for future decommissioning costs. See Note 7. The DOE is responsible for the permanent storage and disposal of spent nuclear fuel removed from nuclear reactors. PP&L pays the DOE a fee for future disposal services and recovers such costs in customer rates. PP&L has joined other utilities in a federal lawsuit to suspend payments to the DOE and to place the fees in escrow unless that department begins accepting nuclear fuel as agreed to in its contract with the utilities. FINANCIAL INVESTMENTS Securities subject to the requirements of SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities" are carried at fair value, determined at the balance sheet date. Net unrealized gains on available-for-sale securities are included in common equity. Net unrealized gains and losses on trading securities are included in income. Net unrealized gains and losses on securities that are not available for unrestricted use due to regulatory or legal reasons are reflected in the related asset and liability accounts. Realized gains and losses on the sale of securities are recognized utilizing the specific cost identification method. PREMIUM ON REACQUIRED LONG-TERM DEBT In accordance with SFAS 71, PP&L deferred the premiums and expenses to redeem long-term debt and amortized these costs over the life of the new debt. If no new debt was issued to refinance the retired debt, these costs were amortized over the remaining life of the retired debt. Effective June 30, 1998, losses on reacquired debt attributable to the generation portion of PP&L's business are being expensed as incurred in accordance with SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt." ACCOUNTING FOR PRICE RISK MANAGEMENT PP&L engages in price risk management activities for both energy trading and non-trading activities as defined by EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." During 1998, the commodity instruments used were forward and option contracts that require physical delivery of the commodity. These instruments were reflected in the financial statements using the accrual method of accounting. As of January 1, 1999, PP&L adopted mark-to-market accounting for energy trading contracts, in accordance with EITF 98-10, and gains and losses from changes in market prices will be reflected in Energy Purchases on the Consolidated Statement of Income. PP&L will continue to use accrual accounting for physical commodity instruments that qualify as hedges of non-trading activities until it adopts SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" on January 1, 2000. Commodity instruments that qualify as hedges manage exposure to market fluctuations in the price of electricity and fuels needed to produce electricity. In order to qualify as a hedge, the price movements in the commodity derivatives must be highly correlated with the price movements of the underlying hedged commodity. When a hedge relationship is terminated, the gains accrued to date will be included in Energy Purchases when the underlying hedged physical transaction closes; losses accrued will be recognized immediately in Energy Purchases. In 1999, PP&L expects to expand its use of commodity instruments to include futures, swaps and financial options. These instruments, which will permit cash settlement, will be recorded at fair value on the Consolidated Balance Sheet. Gains and losses on instruments that qualify as hedges will be recognized in income when the underlying hedged physical transaction closes and will be included in Energy Purchases. Gains and losses related to these transactions, to the extent they are not yet settled in cash, will be reported as Current Assets or Liabilities, in the Consolidated Balance Sheet until recognized in income, until PP&L adopts SFAS 133 on January 1, 2000. Gains and losses on instruments considered trading activities will be recognized currently in Energy Purchases. PP&L Resources has utilized a written call option to manage the interest rate on a portion of its outstanding debt. The premium received is being amortized against interest expense over the expected life of the debt. PP&L Resources or its subsidiaries also enter into foreign currency exchange contracts to hedge future cash flows for firm transactions and commitments and to hedge economic exposures such as anticipated dividends and projected asset sales or acquisitions when there is a high degree of certainty that the exposure will be realized. Until PP&L Resources adopts SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" on January 1, 2000, market gains and losses are recognized and accounted for in accordance with SFAS 52, "Foreign Currency Translation." CAPITAL LEASES Leased property of PP&L capitalized on the Consolidated Balance Sheet consists solely of nuclear fuel. Future lease payments for nuclear fuel are based on the quantity of electricity produced at the Susquehanna Station. The maximum amount of nuclear fuel available for lease under current arrangements is $200 million. REVENUES - ELECTRIC AND GAS OPERATIONS Electric and gas revenues are recorded based on the amounts of electricity and gas delivered to retail customers through the end of each calendar month. This includes amounts customers will be billed for electricity and gas delivered from the time meters were last read to the end of the month. During 1998, PP&L's STAS was zero. This mechanism can be used in the future if needed. The SBRCA expired effective July 1, 1997. The ECR was terminated effective January 1, 1997, and was rolled into base rates. In 1997 and 1998, the PUC authorized PP&L to record undercollected energy costs as a regulatory asset. This regulatory asset was recovered during the restructuring proceeding. See Notes 3 and 4. INCOME TAXES PP&L Resources and its subsidiaries file a consolidated federal income tax return. The provision for PP&L's deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the PUC and FERC. The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under generally accepted accounting principles is deferred and included in taxes recoverable through future rates on the Consolidated Balance Sheet. See Note 6. Investment tax credits were deferred when utilized and are amortized over the average lives of the related assets. PENSION PLAN AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PP&L and Penn Fuel Gas have noncontributory pension plans covering substantially all employees. Subsidiary companies of PP&L formerly engaged in coal mining have a noncontributory pension plan for substantially all non- bargaining, full-time employees. Funding is based upon actuarially determined computations that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974. PP&L Global has a non-qualified retirement plan for its corporate officers. For information on other postretirement and postemployment benefits, see Note 12. CASH EQUIVALENTS All highly liquid debt instruments purchased with original maturities of three months or less are considered to be cash equivalents. COMPREHENSIVE INCOME In 1997 the FASB issued SFAS 130, "Reporting Comprehensive Income." This statement required disclosure of "comprehensive income," defined as changes in equity other than from transactions with shareowners. Comprehensive income consists of net income, as well as holding gains and losses of certain assets (such as available-for-sale securities), foreign currency translation adjustments and pensions liability adjustments. The comprehensive income of PP&L Resources and PP&L was not materially different from net income for the years ended December 31, 1998, 1997 and 1996. STOCK REPURCHASE PROGRAM In September 1998, PP&L Resources purchased approximately 17 million shares of its common stock in a self-tender offer. (Refer to Note 9.) These treasury shares are reflected on the December 31, 1998 Consolidated Balance Sheet of PP&L Resources as an offset to common equity under the cost method of accounting. The cost of the treasury shares was $419 million ($24.50 per share plus transaction costs). Management has no definitive plans for the future use of these shares. These treasury shares are not considered outstanding in calculating earnings per share on the Consolidated Statement of Income of PP&L Resources for the year ended December 31, 1998. 2. SEGMENT AND RELATED INFORMATION Effective December 31, 1998, PP&L Resources adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." PP&L Resources' principal business segment is PP&L, which provides electricity delivery service in eastern and central Pennsylvania, sells retail electricity throughout Pennsylvania, and markets wholesale electricity in 28 states and Canada. PP&L Resources' other reported business segment, PP&L Global, invests in and develops worldwide power projects with the majority of its investments and related revenues as of year-end 1998 located in the U.K., Chile, and El Salvador. PP&L Global's revenue represents equity earnings in investments. Other revenues in the years 1996 and 1997 represent unregulated energy services. In 1998 other revenues represent gas distribution and mechanical contracting and engineering, in addition to unregulated energy services. Financial data for the business segments are as follows (millions of dollars):
1998 - ---- OTHER PP&L AND ELIMIN- PP&L PP&L GLOBAL ATIONS RESOURCES ------- -------- ------------ ---------- INCOME STATEMENT DATA: Operating revenues $3,643 $ 47 (b) $ 96 $3,786 Extraordinary items, net of taxes (948)(a) (948) Interest expense 196 22 12 230 Depreciation and amortization 335 3 338 Income taxes 273 (4) (10) 259 Net income (loss) (587) 15 3 (569) BALANCE SHEET DATA: Cumulative net investment in unconsolidated affiliates 17 671 (b) 688 Total assets 8,838 757 12 9,607 CASH FLOW DATA: Property, plant and equipment expenditures 297 7 304 Investments in unconsolidated affiliates 306 306
(a) See Note 4 for a detailed explanation of Extraordinary Items. (b) Operating revenues were 9.0% of average net investment.
1997 - ---- OTHER PP&L AND ELIMIN- PP&L PP&L GLOBAL ATIONS RESOURCES ------ ------- ------------- --------- INCOME STATEMENT DATA: Operating revenues $3,049 $ 32 (a) $ (4) $3,077 Interest expense 207 8 215 Depreciation and amortization 385 385 Windfall profits tax (37)(b) (37) Income taxes 247 (3) (7) 237 Net income (loss) 308 (17) 5 296 BALANCE SHEET DATA: Cumulative net investment in unconsolidated affiliates 17 360 (a) 377 Total assets 9,472 397 (384)(c) 9,485 CASH FLOW DATA: Property, plant and equipment expenditures 310 310 Investments in unconsolidated affiliates 152 152
(a) Operating revenues were 10.7% of average net investment. (b) See Note 10 for a detailed explanation regarding the windfall profits tax assessed on PP&L Global. (c) Primarily represents a consolidating elimination entry for a loan from CEP, a PP&L subsidiary, to PP&L Resources.
1996 - ---- OTHER PP&L AND ELIMIN- PP&L PP&L GLOBAL ATIONS RESOURCES ------ ------ ----------- --------- INCOME STATEMENT DATA: Operating revenues $2,911 $ 11 (a) $ 4 $2,926 Interest expense 214 6 220 Depreciation and amortization 375 375 Income taxes 255 (1) 254 Net income (loss) 329 1 (1) 329 CASH FLOW DATA: Property, plant and equipment expenditures 360 360 Investments in unconsolidated affiliates 201 201
(a) Operating revenues were 8.6% of average net investment. 3. PUC RESTRUCTURING PROCEEDING In August 1998, the PUC entered a Final Order approving a "Joint Petition for Full Settlement of PP&L's Restructuring Plan and Related Court Proceedings" (Joint Settlement Petition). The following are the major elements of this settlement: 1. PP&L is permitted to recover $2.97 billion (on a net present value basis) in transition costs over 11 years - i.e., from January 1, 1999 through December 31, 2009. PP&L is permitted a return of 10.86% on the unamortized balance of these transition costs. 2. PP&L will reduce rates to all retail customers by 4% effective January 1, 1999 through December 31, 1999. 3. One-third of PP&L customers will be able to choose their electric supplier on January 1, 1999, one-third on January 2, 1999, and the remainder on January 2, 2000. 4. Beginning on January 1, 1999, PP&L will unbundle its retail electric rates to reflect separate prices for the transmission and distribution charges, the CTC (and, if applicable, the ITC), and a "shopping credit" for customers choosing an alternate electric supplier. These shopping credits vary among customer classes and will increase over the transition period to reflect decreases in the CTC. The settlement provided for the following unbundled rates over the transition period: SCHEDULE OF SYSTEM AVERAGE RATES CENTS/KWH
EFFECTIVE TRANSMISSION SHOPPING GENERATION TOTAL DATE & DISTRIBUTION CTC(a) CREDIT RATE CAP(b) RATE(c) - --------- -------------- ------ ------- ----------- ------- Jan. 1, 1999 1.74 1.57 3.81 5.38 7.12 Jan. 1, 2000 1.74 1.55 4.13 5.68 7.42 Jan. 1, 2001 1.74 1.52 4.16 5.68 7.42 Jan. 1, 2002 1.74 1.45 4.23 5.68 7.42 Jan. 1, 2003 1.74 1.41 4.27 5.68 7.42 Jan. 1, 2004 1.74 1.35 4.33 5.68 7.42 Jan. 1, 2005 (d) 1.27 4.41 5.68 (d) Jan. 1, 2006 (d) 1.27 4.78 6.05 (d) Jan. 1, 2007 (d) 1.21 4.84 6.05 (d) Jan. 1, 2008 (d) 1.14 4.91 6.05 (d) Jan. 1, 2009(e) (d) 1.03 5.02 6.05 (d)
(a) Average CTC rates are fixed, subject to reconciliation for actual CTC collection. Reconciliation of the CTC will be reflected in a rider, which will be a separate credit or a separate charge to the CTC (up to the Generation Rate Cap which is the sum of the CTC and the Shopping Credit contained in the tariff). (b) The Generation Rate Cap equals the sum of the CTC and Shopping Credit. The generation portion of bills for customers who continue to be supplied by PP&L as the supplier of last resort will not, on average, exceed the figures in this column. (c) The bundled rate equals the sum of Transmission & Distribution plus Generation Rate Cap. Customers who continue to be supplied by PP&L as the provider of last resort will, on average, pay the total rate shown in the last column. The 1999 rate represents a 4% reduction from the existing rate cap of 7.42 cents/kWh. (d) The cap on PP&L's transmission and distribution rates under the Customer Choice Act is extended from June 30, 2001 through 2004. (e) Effective until December 31, 2009. In addition, the settlement resulted in the following schedule for amortization of the transition costs over the transition period: ANNUAL STRANDED COST AMORTIZATION AND RETURN (a)
REVENUE EXCLUDING GROSS RECEIPTS TAX -------------------------------------- ANNUAL CTC AMORTI- SALES CENTS/ TOTAL RETURN ZATION Year MWH KWH ($000) ($000) ($000) - ---- ---------- ----- -------- -------- -------- 1999 33,108,701 1.57 $497,938 $310,396 $187,542 2000 33,605,332 1.55 498,027 290,796 207,231 2001 34,109,412 1.52 496,671 269,138 227,532 2002 34,621,053 1.45 481,095 245,359 235,736 2003 35,140,369 1.41 473,995 220,722 253,273 2004 35,667,474 1.35 461,682 194,252 267,430 2005 36,202,486 1.27 438,637 166,303 272,334 2006 36,745,524 1.27 447,326 137,841 309,485 2007 37,296,707 1.21 433,106 105,497 327,610 2008 37,856,157 1.14 411,419 71,258 340,161 2009(b) 38,424,000 1.03 377,373 35,708 341,665
(a) Subject to reconciliation for actual CTC collections. (b) Through December 31, 2009. 5. The cap on the generation component of rates is extended from December 31, 2005 until December 31, 2009. The cap on the transmission and distribution component of rates is extended from June 30, 2001 until December 31, 2004. 6. PP&L will recover its nuclear plant decommissioning costs through the CTC. PP&L may seek an exception to the rate cap from customers for increases in these decommissioning costs, but agrees not to recover more than 96% of such increased amount. 7. PP&L is authorized to securitize up to $2.85 billion in transition and related costs, and a PUC Qualified Rate Order authorizing this securitization is included in the settlement. The settlement requires 75% of the savings from securitization to be passed back to customers, while 25% would be retained by PP&L. The costs of issuing the transition bonds and refinancing outstanding debt and equity will be reflected in the ITC charged to all customers. As with the CTC, the ITC must terminate by the end of the transition period; also, the ITC will offset the CTC on customer bills. 8. On January 1, 2002, 20% of all PP&L's residential customers will be assigned to a provider of last resort other than PP&L or an affiliate of PP&L. These customers will be selected at random, and the supplier will be selected on the basis of a PUC-approved bidding process. 9. Subject to a review by the PUC Bureau of Audits, effective on January 1, 1999, alternate electric generation suppliers can provide advanced metering and billing service to PP&L's commercial and industrial customers. Effective on January 1, 1999, such alternate suppliers can provide certain advanced metering service to PP&L's residential customers. Effective on January 1, 2000, PP&L's residential customers can choose their billing service as well from such alternate suppliers. 10. PP&L will transfer its retail marketing function to a separate, affiliated corporation by September 15, 1998. 11. PP&L is permitted, but not required, to transfer ownership and operation of its generating facilities to a separate corporate entity at book value. 12. PP&L will spend approximately $16 million annually on assistance and energy conservation for low-income customers. Pursuant to the Joint Settlement Petition, PP&L transferred its retail marketing function to a new subsidiary, PP&L EnergyPlus, on September 14, 1998. In September 1998, the PUC approved PP&L EnergyPlus's application to act as a Pennsylvania electric generation supplier (EGS). This license permits PP&L EnergyPlus to offer retail electric supply to participating customers in PP&L's service territory and in the service territories of other Pennsylvania utilities. In 1999, PP&L EnergyPlus will offer such supply to industrial and commercial customers throughout the state. At this time, PP&L EnergyPlus has determined not to pursue residential customers in the competitive marketplace based on economic considerations. In September 1998, the PUC issued an Order which, in part, directed Pennsylvania utilities which are members of PJM, including PP&L, to offer their installed capacity at a price of $19.72 per kilowatt-year (Capacity Order). PP&L brought an action in the District Court seeking an injunction against the Capacity Order on the basis, among other things, that it attempted to regulate matters within exclusive federal jurisdiction. In October 1998, PP&L entered into a settlement agreement with the PUC under which (i) PP&L will offer to sell capacity credits to EGS's licensed by the PUC at the equivalent of $19.72 per kilowatt-year prior to June 1, 1999 (increasing to $22.41 per kilowatt-year from June 1, 1999 through December 31, 1999) for service to PP&L residential customers; (ii) all PP&L residential customers will be permitted to select an EGS in January 1999; (iii) the PUC will withdraw the Capacity Order as to PP&L; and (iv) PP&L will withdraw its federal court action against the Capacity Order. 4. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION PP&L prepares its financial statements for its regulated operations in accordance with SFAS 71, which requires rate-regulated companies to reflect the effects of regulatory decisions in their financial statements. PP&L has deferred certain costs pursuant to rate actions of the PUC and the FERC and is recovering, or expects to recover, such costs in electric rates charged to customers. The EITF has addressed the appropriateness of the continued application of SFAS 71 by entities in states that have enacted restructuring legislation similar to Pennsylvania's Customer Choice Act. The EITF came to a consensus on Issue No. 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements 71 and 101," which concluded that an entity should cease to apply SFAS 71 when a deregulation plan is in place and its terms are known. For PP&L, with respect to the generation portion of its business, this occurred effective June 30, 1998 based upon the outcome of the PUC restructuring proceeding. PP&L has adopted SFAS 101 for the generation side of its business. SFAS 101 requires a determination of impairment of plant assets performed in accordance with SFAS 121, and the elimination of all effects of rate regulation that have been recognized as assets and liabilities under SFAS 71. PP&L performed impairment tests of its electric generation assets on a plant specific basis and determined that $2.388 billion of its generation plant was impaired as of June 30, 1998. Impaired plant is the excess of the net plant investment at June 30, 1998 over the present value of the net cash flows during the remaining lives of the plants. Annual net cash flows were determined by comparing estimated generation sustenance costs to estimated regulated revenues for the remainder of 1998, market revenues for 1999 and beyond, and revenues from bulk power contracts. The net cash flows were then discounted to present value. In addition to the impaired generation plant, PP&L estimated that there were other stranded costs totaling $1.989 billion at June 30, 1998. This primarily included generation-related regulatory assets and liabilities and an estimated liability for above-market purchases under NUG contracts. The total estimated impairment to these assets was $4.377 billion. The PUC's Final Order in the restructuring proceeding, entered on August 27, 1998, permitted the recovery of $2.819 billion through the CTC on a present value basis, excluding amounts for nuclear decommissioning and consumer education, resulting in a net under-recovery of $1.558 billion. PP&L recorded an extraordinary charge for this under-recovery in June 1998. Under FERC Order 888, 16 small utilities which had power supply agreements with PP&L signed before July 11, 1994, requested and were provided with PP&L's current estimate of its stranded costs applicable to these customers if they were to terminate their agreements in 1999. Subject to certain conditions, FERC-approved settlement agreements executed with 15 of these customers provide for continued power supply by PP&L through January 2004. As a result of these settlements, PP&L, in the second quarter of 1998, recorded an extraordinary charge in the amount of $56 million. The extraordinary items related to the PUC restructuring proceeding and the FERC settlement are reflected on the Statement of Income, net of income taxes. Details of amounts written-off in June 1998 are as follows (millions of dollars): Impaired generation-related assets $2,388 Above-market NUG contracts 854 Generation-related regulatory assets and other 1,135 ------ Total 4,377 Recoverable transition costs (a) (2,819) ------ Extraordinary item pre-tax - PUC 1,558 - FERC 56 ------ 1,614 Tax effects (666) ------ Extraordinary items $ 948 ====== (a) Excluding recoveries for nuclear decommissioning and consumer education expenditures. PP&L believes that the electric transmission and distribution operations continue to meet the requirements of SFAS 71 and that regulatory assets associated with these operations will continue to be recovered through rates from customers. At December 31, 1998, $311 million of regulatory assets, other than the recoverable transition costs, remain on PP&L's books. These regulatory assets will continue to be recovered through regulated transmission and distribution rates over periods ranging from one to 31 years. 5. SALES TO OTHER ELECTRIC UTILITIES PP&L provided Atlantic with 125,000 kilowatts of capacity (summer rating) and related energy from its wholly owned coal-fired stations. Sales to Atlantic under that agreement expired in March 1998. PP&L provided JCP&L with 378,000 kilowatts of capacity and related energy from all of its generating units during 1998. This amount will decline to 189,000 kilowatts in 1999. The agreement with JCP&L will terminate on December 31, 1999. PP&L expects to be able to resell the returning capacity and energy through its Energy Marketing Center. Under a separate agreement, PP&L is providing additional capacity and energy to JCP&L. This capacity and energy increased from 150,000 kilowatts to 200,000 kilowatts in June 1998, and will increase to 300,000 kilowatts in June 1999 through the end of the agreement in May 2004. Prices for this capacity and energy are market-based. PP&L provides BG&E with 129,000 kilowatts, or 6.6%, of its share of capacity and related energy from the Susquehanna station. Sales to BG&E will continue through May 2001. 6. INCOME AND OTHER TAXES For 1998, 1997 and 1996, the corporate federal income tax rate was 35%, and the Pa. CNI rate was 9.99%. The tax effects of significant temporary differences comprising PP&L Resources' net deferred income tax liability were as follows (millions of dollars):
1998 1997 ------- ------- Deferred tax assets Deferred investment tax credits $ 59 $ 82 Non-utility generation contracts over market price & buybacks 389 Accrued pension costs 99 77 Contribution in aid of construction 22 19 Other 163 47 Valuation allowance (6) (6) ------ ------ 726 219 ------ ------ Deferred tax liabilities Electric utility plant - net 719 1,755 Restructuring - CTC 1,169 Taxes recoverable through Future rates 100 377 Reacquired debt costs 13 43 Other 80 44 ------ ------ 2,081 2,219 ------ ------ Net deferred tax liability $1,355 $2,000 ------ ------
Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to income from continuing operations for accounting purposes, and details of taxes, other than income are as follows (millions of dollars):
INCOME TAX EXPENSE 1998 1997 1996 ------ ------ ------ Provision - Federal $ 183 $ 162 $ 189 State 64 57 65 ----- ----- ----- 247 219 254 ----- ----- ----- Deferred - Federal 19 19 5 State 3 9 5 ----- ----- ----- 22 28 10 ----- ----- ----- Investment tax credit, net - Federal (10) (10) (10) ----- ----- ----- 259 237 254 ----- ----- ----- Total income tax Expense - Federal 192 171 184 State 67 66 70 ----- ----- ----- $ 259 $ 237 $ 254 ----- ----- -----
Reconciliation of Income Tax Expense Indicated federal income tax on pre-tax income before extraordinary item at statutory tax rate - 35% $ 232 $ 195 $ 213 Increase (decrease) due to: State income taxes 43 40 44 Flow through of depreciation differences not previously normalized 9 22 20 Amortization of investment tax credit (10) (10) (10) Research & experimentation income tax credits (1) (1) (5) Other (14) (9) (8) ----- ----- ----- 27 42 41 ----- ----- ----- Total income tax expense $ 259 $ 237 $ 254 ----- ----- ----- Effective income tax rate 39.1% 42.5% 41.6% Taxes, Other Than Income State gross receipts $ 105 $ 104 $ 105 State utility realty 41 46 44 State capital stock 18 34 34 Social security and other 24 20 20 ----- ----- ----- $ 188 $ 204 $ 203 ----- ----- -----
7. NUCLEAR DECOMMISSIONING COSTS PP&L's most recent estimate of the cost to decommission the Susquehanna station was completed in 1993 and was a site-specific study, based on immediate dismantlement and decommissioning of each unit following final shutdown. The study indicates that PP&L's 90% share of the total estimated cost of decommissioning the Susquehanna station is approximately $724 million in 1993 dollars. The estimated cost includes decommissioning the radiological portions of the station and the cost of removal of nonradiological structures and materials. The operating licenses for Units 1 and 2 expire in 2022 and 2024, respectively. Decommissioning costs have been historically charged to operating expense and have been based upon amounts included in customer rates. Beginning in 1998, decommissioning costs have been reclassified as a component of depreciation expense. Decommissioning charges were $12 million in each of the last three years. Beginning in January 1999, in accordance with the PUC's Restructuring Decision, decommissioning costs will be recovered from customers through the CTC over the 11 year life of the CTC rather than the remaining life of Susquehanna. The recovery will include a return on unamortized decommissioning costs. Amounts collected from customers for decommissioning, less applicable taxes, are deposited in external trust funds for investment and can be used only for future decommissioning costs. The market value of securities held and accrued income in the trust funds at December 31, 1998 and 1997 aggregated approximately $206 million and $163 million, respectively. The trust funds experienced, on a fair market value basis, a $31 million net gain in 1998, which includes net unrealized appreciation of $26 million, and a net gain in 1997 of $24 million, which includes net unrealized appreciation of $18 million. The trust fund activity is reflected in the nuclear plant decommissioning trust fund and in other noncurrent liabilities on the Consolidated Balance Sheet. Accrued nuclear decommissioning costs were $209 million and $166 million at December 31, 1998 and 1997, respectively. The FASB issued an exposure draft on the accounting for liabilities related to closure and removal of long-lived assets, including decommissioning of nuclear power plants. As a result, current industry accounting practices for decommissioning may change, including the possibility that the estimated cost for decommissioning could be recorded as a liability at the present value of the estimated future cash outflows that will be required to satisfy those obligations. Due to the FASB's recognition that these issues intertwine with other unresolved accounting issues, the FASB has not yet determined when it will issue another exposure draft or a final statement. 8. FINANCIAL INSTRUMENTS As of December 31, 1998, PP&L Resources was party to two foreign exchange contracts: to purchase approximately $27 million with 16 million British pounds sterling (BPS) on March 31, 1999 and to purchase $0.7 million with 359 million Chilean pesos (ChP) on January 22, 1999. The carrying amount shown on the Consolidated Balance Sheet and the estimated fair value of PP&L Resources' financial instruments are as follows (millions of dollars):
December 31, 1998 December 31, 1997 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- ------ --------- ------ ASSETS Nuclear plant decommis- sioning trust fund (a) $ 206 $ 206 $ 163 $ 163 Financial investments (a) 1 1 58 62 Other investments 11 11 13 13 Cash and cash equivalents 195 195 50 50 Other financial instru- ments included in other current assets 5 5 3 3 LIABILITIES Preferred stock with sinking fund requirements (b) 47 50 47 49 Company-obligated mandatorily redeemable preferred secur- ities of subsidiary trusts holding solely company debentures (b) 250 259 250 256 Long-term debt (b) 2,984 3,176 2,735 2,895 Commercial paper and bank loans 636 636 135 135
(a) The carrying value of these financial instruments generally is based on established market prices and approximates fair value. (b) The fair value generally is based on quoted market prices for the securities where available and estimates based on current rates offered to PP&L Resources where quoted market prices are not available. 9. CREDIT ARRANGEMENTS & FINANCING ACTIVITIES PP&L issues commercial paper and, from time to time, borrows from banks to provide short-term funds for PP&L's general corporate purposes. Bank borrowings generally bear interest at rates negotiated at the time of the borrowing. At December 31, 1998, PP&L had $80 million of commercial paper outstanding. PP&L Capital Funding, whose purpose is to provide debt funding for PP&L Resources and its subsidiaries other than PP&L, established a commercial paper program in March 1998. As with all PP&L Capital Funding debt, this commercial paper is guaranteed by PP&L Resources. As of December 31, 1998, PP&L Capital Funding had $553 million of commercial paper outstanding. Proceeds from the commercial paper program were primarily used to fund PP&L Resources' common stock tender offer and provide interim financing for PP&L Global's investment activities. The weighted average interest rate on short-term borrowings was 6.1% and 6.6% at December 31, 1998 and 1997, respectively, for both PP&L Resources and PP&L. In order to ensure liquidity, PP&L and PP&L Capital Funding share a joint facility with a group of banks. This joint facility is comprised of a 364-day revolving credit agreement and a five-year revolving credit agreement. In March 1998, the existing 364-day revolving credit agreement was increased from $150 million to $350 million. This increase, when added to the $300 million five- year revolving credit agreement, brought to $650 million the total amount of revolving credit available to PP&L and PP&L Capital Funding under the joint agreement. In November 1998, PP&L, PP&L Capital Funding and PP&L Resources replaced the existing 364-day facility with an amended and restated 364-day revolving credit agreement terminating in November 1999. The five-year revolving credit agreement expires in 2002. Separately, in July 1998, PP&L Capital Funding entered into five separate $80 million, 364-day credit facilities with five banks. PP&L Resources guarantees all obligations of PP&L Capital Funding under the foregoing facilities. As of December 31, 1998, no borrowings were outstanding under any revolving credit agreements. In April 1998, PP&L retired $150 million principal amount of First Mortgage Bonds, 5-1/2% Series that matured at that time. In May 1998, PP&L issued $200 million First Mortgage Bonds, 6-1/8% Reset Put Securities Series due 2006. In connection with this issuance, PP&L assigned to a third party the option to call the bonds from the holders on May 1, 2001. These bonds will mature on May 1, 2006, but will be required to be surrendered by the existing holders on May 1, 2001 either through the exercise of the call option by the callholder or, if such option is not exercised, through the automatic exercise of a mandatory put by the trustee on behalf of the bondholders. If the call option is exercised, the bonds will be remarketed and the interest rate will be reset for the remainder of their term to the maturity date. If the call option is not exercised, the mandatory put will be exercised and PP&L will be required to repurchase the bonds at 100% of their principal amount on May 1, 2001. Proceeds from the sale of the bonds were used by PP&L to retire $116 million of its unsecured term loans and to reduce its outstanding commercial paper balances. During 1998, PP&L Capital Funding issued a total of $295 million of medium- term notes with maturities varying from two to seven years. The proceeds of these notes were generally used to reduce commercial paper balances. As of December 31, 1998, $397 million of medium-term notes were outstanding. In September 1998, PP&L Resources purchased 17 million shares of its common stock, or approximately 10% of the outstanding shares, from existing shareowners at a price of $24.50 per share through a self tender process. PP&L Resources has authorization from the Board of Directors to purchase another three million shares on the open market or in negotiated transactions. PP&L Resources has not repurchased any shares under this additional authorization. In October 1998, Penn Fuel Gas retired $27 million of long-term debt. Of this amount, $20 million of the retired notes had an interest rate of 7.51%, and the remainder had an interest rate of 6.70%. These notes would have required annual installment payments through 2014. During 1998, PP&L Resources issued $56 million of common stock through the DRIP and $6 million of common stock through the ESOP. Effective with the dividend payable October 1, 1998 to owners of record on September 10, 1998, PP&L Resources' quarterly Common Stock dividend was reduced to $0.25 per share ($1.00 annualized rate) from the previous level of $0.4175 per share ($1.67 annualized rate). Declaration of dividends on common stock is made at the discretion of the Board of Directors of PP&L Resources and PP&L. PP&L Resources and PP&L will continue to consider the appropriateness of these dividend levels, taking into account the respective financial positions, results of operations, conditions in the industry and other factors which the respective Boards deem relevant. PP&L leases its nuclear fuel from a trust. The maximum financing capacity of the trust under existing credit arrangements is $200 million. As of December 31, 1998, the trust had issued $188 million of commercial paper to support nuclear fuel purchases. PP&L Capital Funding registered $400 million of debt securities with the SEC in early January 1999. It is expected these debt securities will be issued from time to time as medium-term notes to provide long-term debt financing for PP&L Resources and its subsidiaries other than PP&L. Under the PUC restructuring order of August 27, 1998, PP&L is permitted to issue transition bonds to securitize up to $2.85 billion of its stranded costs. PP&L is planning to pursue such securitization later in 1999. The proceeds are expected to be used by PP&L to retire outstanding debt and to repurchase common stock from PP&L Resources. 10. WINDFALL PROFITS TAX - PP&L GLOBAL In July 1997, the U.K. assessed a windfall profits tax on privatized utilities. SWEB's windfall profits tax was approximately 90 million pounds sterling, or about $148 million. Based on PP&L Global's 25% ownership interest in SWEB at that time, PP&L Resources incurred a one-time charge against earnings of $37 million, or 23 cents per share, in 1997. This charge is included in "Other Income and Deductions." The tax was fully paid. 11. ACQUISITIONS In 1998 PP&L Resources acquired Penn Fuel Gas. The transaction was treated as a purchase for accounting and financial reporting purposes. PP&L Resources issued approximately 5.6 million shares of common stock with a value of approximately $135 million, to acquire all Penn Fuel Gas common and preferred stock. Under the terms of the merger agreement, shareowners of Penn Fuel Gas received 6.968 common shares of PP&L Resources for each common share of Penn Fuel Gas that they owned and 0.682 common shares of PP&L Resources for each preferred share of Penn Fuel Gas that they owned. In 1998, PP&L Resources also acquired H.T. Lyons and McClure, mechanical contractor and engineering firms, in cash transactions for amounts that were not material. In January 1999, PP&L Resources announced that it had reached an agreement to acquire McCarl's, another mechanical contractor and engineering firm, in a cash transaction for an amount that is not material. The closing of the acquisition is expected to occur in February 1999. In September 1998, PP&L Global announced an agreement to acquire most of Bangor Hydro-Electric Company's generating assets and certain transmission rights. PP&L Global will purchase 100 percent of Bangor Hydro's hydroelectric assets and certain transmission rights, as well as its interest in an oil-fired generation facility, for $89 million. The acquisition has been approved by the Maine Public Utilities Commission, and remains subject to the approval of the FERC as well as certain third-party consents, which are expected in 1999. PP&L Global has signed definitive agreements with Montana Power Company, Portland General Electric Company and Puget Sound Energy, Inc. to acquire 13 Montana power plants, with 2,614 MW of generating capacity, for a purchase price of $1.586 billion. The acquisition is subject to several conditions, including the receipt of required state and federal regulatory approvals and third-party consents. In this regard, PacifiCorp, a co-owner of Colstrip Units 3 and 4, has a right of first refusal to purchase a portion of the assets of these units. PP&L Global expects to complete the acquisition by the end of 1999. About 65% of the acquisition cost is expected to be financed on a project credit basis, non-recourse to PP&L Global and PP&L Resources. The balance of the acquisition cost is expected to be financed through a combination of debt and equity issued by PP&L Resources, or with funds that PP&L Resources derives from PP&L's securitization of transition costs. The agreements also provide for PP&L Global's acquisition of related transmission assets for $182 million, subject to certain conditions, including federal regulatory approval. 12. PENSION PLAN AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Pension Plan PP&L and Penn Fuel Gas have funded, noncontributory defined benefit pension plans covering substantially all employees. Benefits are based upon a participant's earnings and length of participation in the plans, subject to meeting certain minimum requirements. PP&L and Penn Fuel Gas have unfunded, supplemental retirement plans for certain management employees. Benefit payments pursuant to these supplemental plans are made directly by PP&L and Penn Fuel Gas, respectively. PP&L and Penn Fuel Gas recently terminated similar nonqualified retirement plans for the benefit of their directors. At December 31, 1998, the projected benefit obligation of these supplemental plans was approximately $29 million for PP&L and Penn Fuel Gas. PP&L Global has established, effective December 1, 1994, a non-qualified retirement plan for its corporate officers. The cost of the Plan was not material in 1998. The components of PP&L's net periodic pension cost for the three plans were (millions of dollars):
1998 1997 1996 Service cost-benefits earned during the period $ 35 $ 32 $ 32 Interest cost 67 64 61 Expected return on plan assets (86) (77) (71) Net amortization and deferral (13) (11) (7) ----- ----- ----- Net periodic pension cost $ 3 $ 8 $ 15 ===== ===== =====
The net periodic pension cost charged to operating expenses was $2 million in 1998, $5 million in 1997 and $9 million in 1996. The balance was charged to construction and other accounts. The funded status of PP&L's Plan at December 31 was (millions of dollars):
1998 1997 Change in Plan Assets: Fair value of plan assets at beginning of year $1,396 $1,187 Actual return on plan assets 240 254 Actual expense paid (3) (3) Net benefits paid (42) (42) ------ ------ Fair value of plan at end of year 1,591 1,396 ------ ------ Change in Benefit Obligation Net benefit obligation at beginning of year 962 887 Service cost 35 32 Interest cost 66 63 Plan amendments 66 Actuarial loss 70 25 Special termination benefits 9 Actual expense paid (3) (3) Net benefits paid (42) (42) ------ ------ Net benefit obligation at end of year 1,163 962 ------ ------ Plan assets in excess of projected benefit obligation 428 434 Unrecognized transition assets (being amortized over 23 years) (50) (54) Unrecognized prior service cost 115 52 Unrecognized net gain (707) (636) ------ ------ Accrued expense $ (214) $ (204) ====== ======
The weighted average discount rate used in determining the actuarial present value of projected benefit obligations was 6.25% and 6.75% on December 31, 1998 and 1997, respectively. The rate of increase in future compensation used in determining the actuarial present value of projected benefit obligations was 5.0% on December 31, 1998 and 1997. The assumed long-term rates of return on assets used in determining pension cost in 1998 and 1997 was 8.0%. Plan assets consist primarily of common stocks, government and corporate bonds and temporary cash investments. PP&L's subsidiaries formerly engaged in coal mining have a noncontributory defined benefit pension plan covering substantially all non-bargaining unit, full-time employees, which is fully funded and in a separate account managed by an insurance company. This plan was amended to freeze benefit accruals and benefit increases effective June 1996. In addition, the companies are liable under federal and state laws to pay black lung benefits to claimants and dependents with respect to approved claims, and are members of a trust which was established to facilitate payment of such liabilities. Such costs were not material in 1998, 1997 and 1996. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Substantially all employees of PP&L and its subsidiaries will become eligible for certain health care and life insurance benefits upon retirement. PP&L sponsors four health and welfare benefit plans that cover substantially all management and bargaining unit employees upon retirement. One plan provides for retiree health care benefits to certain management employees, another plan provides retiree health care benefits to bargaining unit employees, a third plan provides retiree life insurance benefits to certain management employees up to a specified amount and a fourth plan provides retiree life insurance benefits to bargaining unit employees. Dollar limits have been established for the amount PP&L will contribute annually toward the cost of retiree health care for employees retiring after March 1993. The PUC Decision in 1995 permitted recovery of the PUC-jurisdictional amount of retiree health care costs resulting from the adoption of SFAS 106. The PUC Decision permitted PP&L to recover, over a period of about 17 years, the amount of SFAS 106 costs deferred. In June 1998, the generation-related portion of these costs were written off as part of the PUC restructuring proceeding and the FERC settlement with 16 small utilities. In December 1993, PP&L established a separate VEBA for each of the four health and welfare benefit plans for retirees. After making initial contributions, additional funding of the trusts was deferred pending resolution of PP&L's ability to recover the costs of the plans in rates. Continued funding of these trusts was subject to the resolution of the OCA appeal of the PUC Decision. In 1997, the Pennsylvania Supreme Court ruled that the Commonwealth Court's decision to uphold the PUC Decision was final. In 1998, PP&L contributed an additional $25 million to these VEBAs. The following table sets forth the plans' combined funded status reconciled with the amount shown on PP&L's Consolidated Balance Sheet as of December 31 (millions of dollars):
1998 1997 Change in Benefit Obligation: Net benefit obligation at beginning of year $ 237 $ 249 Service cost 4 4 Interest cost 16 17 Plan amendments 10 Actuarial (gain) loss 42 (22) Net benefits paid (13) (11) ----- ------ Net benefit obligation at end of year 296 237 ----- ------ Change in Plan Assets: Fair value of plan assets at beginning of year 64 31 Actual return on plan assets 13 2 Employer contributions 37 42 Net benefits paid (13) (11) ----- ------ Fair value of plan assets at end of year 101 64 ----- ------ Accumulated postretirement benefit obligation in excess of plan assets 195 173 Unrecognized prior service costs (14) (4) Unrecognized net loss (44) (11) Unrecognized transition obligation (being amortized over 20 years) (122) (131) ----- ------ Accrued postretirement benefit cost $ 15 $ 27 ===== ====== The net periodic postretirement benefit cost included the following components (millions of dollars): 1998 1997 1996 Service cost - benefits attributed to service during the period $ 4 $ 4 $ 4 Interest cost on accumulated postretirement benefit obligation 16 17 15 Actual return on plan assets (4) (2) (1) Net amortization and deferral 9 10 9 ----- ----- ------ Net periodic postretirement benefit cost $ 25 $ 29 $ 27 ===== ===== ======
Retiree health and benefits costs charged to operating expenses were approximately $19 million in 1998, $23 million in 1997, and $20 million in 1996. Costs in excess of the amount charged to expense were charged to construction and other accounts. For measurement purposes, an 7.75% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999; the rate was assumed to decrease gradually to 6% by 2006 and remain at that level thereafter. Increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1998, by about $13 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by about $1 million. In determining the accumulated postretirement benefit obligation, the weighted average discount rate used was 6.25% and 6.75% on December 31, 1998 and 1997, respectively. The trusts that are holding the plan assets, except for retiree health care benefits to certain management employees, are tax-exempt. The expected long-term rate of return on plan assets for the tax-exempt trusts was 6.35% and 6.5% on December 31, 1998 and 1997, respectively. PP&L and its subsidiaries formerly engaged in coal mining accrued an additional liability for the cost of health care of retired miners previously employed by them. The liability, based on the present value of future benefits, was estimated at $50 million and $51 million as of December 1998 and 1997, respectively. In December 1997, PP&L contributed $25 million to a VEBA to partially fund these health care costs. There were no funding contributions made in 1998. POSTEMPLOYMENT BENEFITS PP&L provides health and life insurance benefits to disabled employees and income benefits to eligible spouses of deceased employees. Postemployment benefits charged to operating expenses were not material. 13. JOINTLY OWNED FACILITIES At December 31, 1998, PP&L or its subsidiary owned undivided interests in the following facilities (millions of dollars):
MERRILL ------GENERATING STATIONS------ CREEK SUSQUEHANNA KEYSTONE CONEMAUGH RESERVOIR Ownership interest 90.00% 12.34% 11.39% 8.37% Electric utility plant in service $4,085 $ 68 $ 103 Other property $ 22 Accumulated depreciation 3,388 39 45 10 Construction work in progress 53 1
Each participant in these facilities provides its own financing. PP&L receives a portion of the total output of the generating stations equal to its percentage ownership. PP&L's share of fuel and other operating costs associated with the stations is reflected on the PP&L Consolidated Statement of Income. The Merrill Creek Reservoir provides water during periods of low river flow to replace water from the Delaware River used by PP&L and other utilities in the production of electricity. 14. COMMITMENTS AND CONTINGENT LIABILITIES CONSTRUCTION EXPENDITURES PP&L's construction expenditures for the period 1999-2003 are estimated to aggregate $1.8 billion, including AFUDC and capitalized interest. For discussion pertaining to construction expenditures, see Review of Financial Condition and Results of Operations under the caption "Financial Condition -Capital Expenditure Requirements." NUCLEAR INSURANCE PP&L is a member of certain insurance programs which provide coverage for property damage to members' nuclear generating stations. Facilities at the Susquehanna station are insured against property damage losses up to $2.75 billion under these programs. PP&L is also a member of an insurance program which provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, PP&L could be assessed retroactive premiums in the event of the insurers' adverse loss experience. At December 31, 1998, the maximum amount PP&L could be assessed under these programs was about $25 million. PP&L's public liability for claims resulting from a nuclear incident at the Susquehanna station is limited to about $9.7 billion under provisions of The Price Anderson Amendments Act of 1988. PP&L is protected against this liability by a combination of commercial insurance and an industry assessment program. In the event of a nuclear incident at any of the reactors covered by The Price Anderson Amendments Act of 1988, PP&L could be assessed up to $168 million per incident, payable at a rate of $20 million per year, plus an additional 5% surcharge, if applicable. ENVIRONMENTAL MATTERS Air --- The Clean Air Act deals, in part, with acid rain, attainment of federal ambient ozone standards and toxic air emissions. PP&L has complied with the 1995 Phase I acid rain provisions by installing continuous emission monitors on all units, burning lower sulfur coal and installing low NOx burners on most units. To comply with the year 2000 Phase II acid rain provisions, PP&L plans to purchase lower sulfur coal and use banked or purchased emission allowances instead of installing FGD on its wholly owned units. PP&L has met the 1995 ambient ozone requirements of the Clean Air Act by reducing NOx emissions by nearly 50% through the use of low NOx burners. Further seasonal (i.e., 5 month) NOx reductions to 55% and 75% of 1990 levels for 1999 and 2003, respectively, are specified under the Northeast Ozone Transport Region's Memorandum of Understanding. The DEP has finalized regulations which require PP&L to reduce its ozone seasonal NOx by 57% beginning in 1999. PP&L plans to comply with this reduction with operational initiatives that rely, to a large extent, on the existing low NOx burners. The EPA has finalized new national standards for ambient levels of ground- level ozone and fine particulates. Based in part on the new ozone standard, the EPA has finalized NOx emission limits for 22 states, including Pennsylvania, which in effect require approximately an 80% reduction from the 1990 level in Pennsylvania by May 2003; the state is required by September 1999 to develop plans for implementing this reduction. Pursuant to Section 126 of the Clean Air Act, several Northeast states have petitioned the EPA to find that major sources of NOx emissions, including PP&L's power plants, are significantly contributing to non- attainment in those states. The EPA has proposed to find such contribution and require emissions reductions at those sources if the states in which those sources are located fail to develop plans by September 1999 to implement the proposed 2003 limits. PP&L estimates that compliance with these emissions reduction requirements could require installation of NOx emissions removal systems on PP&L's three largest coal-fired units, at a capital cost of approximately $35 million per unit. The new particulates standard may require further reductions in SO2 and may expand the planned seasonal NOx reductions to year round in the 2010-2012 timeframe. Under the Clean Air Act, the EPA has been studying the health effects of hazardous air emissions from power plants and other sources, in order to determine whether those emissions should be regulated. Recently, the EPA released a technical report of its findings to date. The EPA concluded that mercury is the power plant air toxic of greatest concern, but that more evaluation is needed before it can determine whether regulation of air toxics from fossil fuel plants is necessary. EPA is now seeking mercury and chlorine sampling and other data from electric generating units including PP&L's. In addition, the EPA has announced a new enforcement initiative against older coal- fired plants. Several of PP&L's coal-fired plants could fall into this category. These EPA initiatives could result in compliance costs for PP&L in amounts which are not now determinable but which could be material. Expenditures to meet the 2000 acid rain and 1999 NOx reduction requirements are included in the table of projected construction expenditures in the section entitled "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations. PP&L currently estimates that additional capital expenditures and operating costs for environmental compliance under the Clean Air Act will be incurred beyond 2002 in amounts which are not now determinable but which could be material. Water and Residual Waste ------------------------ PP&L has installed dry fly ash handling systems at most of its power stations, which reduces waste water discharge. In other cases, PP&L has modified the existing facilities to allow continued operation of the ash basins under a DEP permit. Any groundwater contamination caused by the basins must also be addressed. Groundwater degradation related to fuel oil leakage from underground facilities and seepage from coal refuse disposal areas and coal storage piles has been identified at several PP&L generating stations. Remedial work related to oil leakage is substantially completed at two generating stations. At this time, the only other remedial work being planned is to abate a localized groundwater degradation problem associated with a waste disposal impoundment at the Montour plant. The final NPDES permit for the Montour plant contains stringent limits for iron and chlorine discharges. Depending on the results of a toxic reduction study, additional water treatment facilities or operational changes may be needed at this plant. Capital expenditures through the year 2003 to correct groundwater degradation at fossil-fueled generating stations, and to address waste water control at PP&L facilities are included in the table of construction expenditures in the section entitled "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations. In this regard, PP&L currently estimates that $5.5 million of additional capital expenditures may be required in the next four years to close some of the ash basins and address other ash basin issues at various generating plants. Additional capital expenditures could be required beyond the year 2003 in amounts which are not now determinable but which could be material. Actions taken to correct groundwater degradation, to comply with the DEP's regulations and to address waste water control are also expected to result in increased operating costs in amounts which are not now determinable but which could be material. Superfund and Other Remediation ------------------------------- In 1995, PP&L entered into a consent order with the DEP to address a number of sites where PP&L may be liable for remediation of contamination. This may include potential PCB contamination at certain PP&L substations and pole sites; potential contamination at a number of coal gas manufacturing facilities formerly owned and operated by PP&L; and oil or other contamination which may exist at some of PP&L's former generating facilities. As of December 31, 1998, PP&L has completed work on slightly more than half of the sites included in the consent order. In 1996, Penn Fuel Gas entered into a similar consent order with the DEP to address a number of its sites where Penn Fuel Gas may be liable for remediation of contamination. The sites primarily include former coal gas manufacturing facilities. Prior to PP&L Resources acquiring Penn Fuel Gas on August 21, 1998, Penn Fuel Gas had obtained a "no further action" determination from the DEP for two of the 20 sites covered by the order. At December 31, 1998, PP&L had accrued approximately $6 million and Penn Fuel Gas had accrued $15 million, representing the respective amounts PP&L and Penn Fuel Gas can reasonably estimate they will have to spend to remediate sites involving the removal of hazardous or toxic substances, including those covered by each company's consent orders mentioned above. Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in material additional operating costs for PP&L or Penn Fuel Gas, which neither company can estimate at this time. In addition, certain federal and state statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental agencies, such as the EPA and the DEP, to seek compensation from the responsible parties for the lost value of damaged natural resources. The EPA and the DEP may file such compensation claims against the parties, including PP&L or Penn Fuel Gas, held responsible for cleanup of such sites. Such natural resource damage claims against PP&L or Penn Fuel Gas could result in material additional liabilities. General ------- Due to the environmental issues discussed above or other environmental matters, PP&L may be required to modify, replace or cease operating certain facilities to comply with statutes, regulations and actions by regulatory bodies or courts. In this regard, PP&L also may incur capital expenditures, operating expenses and other costs in amounts which are not now determinable but which could be material. LOAN GUARANTEES OF AFFILIATED COMPANIES At December 31, 1998, PP&L provided a guarantee in the amount of $12 million in support of one of its subsidiaries. PP&L Resources also provides certain guarantees for its subsidiaries. Specifically, PP&L Resources guarantees all of the debt of PP&L Capital Funding. As of December 31, 1998, PP&L Resources guaranteed $397 million of medium-term notes and $552 million of commercial paper issued by PP&L Capital Funding. PP&L Resources also provided $13 million of loan guarantees to a PP&L Global subsidiary in the fourth quarter of 1998. Also in the fourth quarter, PP&L Resources guaranteed $19 million of notes of North Penn Gas Co., a subsidiary of Penn Fuel Gas. Additionally, PP&L Resources has guaranteed certain obligations of PP&L EnergyPlus for up to $31 million under power purchase and sales agreements. Source of Labor Supply As of December 31, 1998, PP&L Resources and its subsidiaries had approximately 7,600 employees, including 6,344 full-time PP&L employees. Approximately 65 percent of PP&L's full-time employees are represented by the IBEW. PP&L reached a new labor agreement with the IBEW in 1998. This agreement expires in May 2002. 15. New Accounting Standards In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which is effective for fiscal years beginning after December 15, 1997. The adoption of this statement did not have a material impact on the financial statements of PP&L Resources or PP&L. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 also expanded the definition of a derivative to include most commodity contracts that require physical delivery. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. PP&L Resources and its subsidiaries intend to adopt this statement as of January 1, 2000. The impact of the adoption of this statement on the net income of PP&L Resources and PP&L is not yet determinable but may be material. In November 1998, the EITF reached a consensus on EITF Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." For purposes of Issue 98-10, energy trading activities refer to energy contracts entered into with the objective of generating profits on or from exposure to shifts or changes in market prices, and risk management activities refer to energy contracts that are designated as, and effective as, hedges of nontrading activities. Effective January 1, 1999, EITF Issue 98-10 requires that companies "mark to market" (that is, record the fair value of the contracts on the balance sheet, with gains and losses reflected in earnings) energy contracts that constitute energy trading activities. Energy contracts that are hedges of nontrading activities should continue to be accounted for in accordance with a company's existing hedge accounting policies. PP&L Resources and PP&L will continue, until the adoption of SFAS 133, to use accrual accounting for contracts that are hedges of nontrading activities. PP&L Resources and PP&L adopted EITF 98-10 on January 1, 1999 and expect to recognize an after-tax credit to income of approximately $6.0 million as an offset to energy purchases. PP&L Resources, Inc PP&L, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E - ---------------------------------------------------- ---------- --------- ----------- ---------- Deductions Additions from Balance ---------------------------------- Reserves - at Charged Losses or Balance at Beginning Charged to Other Expenses End of Description of Period to Income Accounts Applicable Period - ---------------------------------------------------- ----------- ------------ ----------- ------------- --------- (Millions of Dollars) Year Ended December 31, 1998 - ---------------------------------------------------- Reserves deducted from assets in the Balance Sheet Uncollectible accounts.......................... $16 $24 $24 $16 Obsolete inventory - Materials and supplies..... 12 1 11 Year Ended December 31, 1997 - ---------------------------------------------------- Reserves deducted from assets in the Balance Sheet Uncollectible accounts.......................... 25 17 26 16 Year Ended December 31, 1996 - ---------------------------------------------------- Reserves deducted from assets in the Balance Sheet Uncollectible accounts.......................... 35 20 30 25 Obsolete inventory - Materials and supplies..... 15 15
QUARTERLY FINANCIAL, COMMON STOCK PRICE AND DIVIDEND DATA (UNAUDITED) PP&L Resources, Inc. and Subsidiaries (Millions of Dollars, except per share data) For the Quarters Ended (a) MARCH 31 JUNE 30 SEPT. 30 DEC. 31 1998 Operating revenues............................. $ 880 $ 838 $ 1,166 $ 902 Operating income............................... 236 148 262 181 Net income before extraordinary items.......... 101 54 136 88 Net income..................................... 101 (894) 136 88 Earnings per common share (b).................. 0.60 (5.34) 0.81 0.56 Dividends declared per common share (c)........ 0.4175 0.4175 0.25 0.25 Price per common share High......................................... 24-1/4 24-3/8 26-3/8 28-15/16 Low.......................................... 21-11/16 20-7/8 22 24-15/16 1997 Operating revenues............................. $ 795 $ 693 $ 792 $ 797 Operating income............................... 264 166 201 169 Net income before extraordinary items.......... 117 65 42 72 Net income..................................... 117 65 42 72 Earnings per common share (b).................. 0.72 0.39 0.25 0.44 Dividends declared per common share (c)........ 0.4175 0.4175 0.4175 0.4175 Price per common share High......................................... 24 20-7/8 23-1/16 24-1/4 Low.......................................... 20 19 19-7/16 20 (a) PP&L's electric utility business is seasonal in nature with peak sales periods generally occurring in the winter months. In addition earnings in several quarters were affected by several one-time adjustments. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations. In addition, PP&L Resources' second quarter results of 1998 include an after-tax charge of $948 million. See Note 4. (b) The sum of the quarterly amounts may not equal annual earnings per share due to changes in the number of common shares outstanding during the year or rounding. (c) PP&L Resources has paid quarterly cash dividends on its common stock in every year since 1946. The dividends paid per share in 1997 were $1.67 and in 1998 were $1.50. The most recent regular quarterly dividend paid by PP&L Resources was 25 cents per share (equivalent to $1.00 per annum) paid January 1, 1999. Future dividends will be dependent upon future earnings, financial requirements and other factors. QUARTERLY FINANCIAL DATA (UNAUDITED) PP&L, Inc. and Subsidiaries (Millions of Dollars) For the Quarters Ended (a) MARCH 31 JUNE 30 SEPT. 30 DEC. 31 1998 Operating revenues........................... $ 861 $ 818 $ 1,131 $ 833 Operating income............................. 231 143 259 168 Net income before extraordinary items........ 109 63 137 100 Net income................................... 109 (885) 137 100 Earnings available to PP&L Resources......... 97 (897) 125 88 1997 Operating revenues........................... $ 785 $ 686 $ 778 $ 800 Operating income............................. 258 163 191 178 Net income before extraordinary items........ 120 70 81 77 Net income................................... 120 70 81 77 Earnings available to PP&L Resources......... 113 61 69 65 (a) PP&L's electric utility business is seasonal in nature with peak sales periods generally occurring in the winter months. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations. In addition, PP&L's second quarter results of 1998 include an after-tax charge of $948 million. See Note 4.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ------------------------ None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- Information for this item concerning directors of PP&L Resources will be set forth in the sections entitled "Nominees for Directors" and "Directors Continuing in Office" in PP&L Resources' 1999 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1998, and which information is incorporated herein by reference. Information required by this item concerning the executive officers of PP&L Resources is set forth at the end of Part I of this report. Information for this item concerning directors of PP&L will be set forth in the sections entitled "Nominees for Directors" and "Directors Continuing in Office" in PP&L's 1999 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1998, and which information is incorporated herein by reference. Information required by this item concerning the executive officers of PP&L is set forth at the end of Part I of this report. ITEM 11. EXECUTIVE COMPENSATION ------------------------------- Information for this item for PP&L Resources will be set forth in the sections entitled "Compensation of Directors," "Summary Compensation Table" and "Retirement Plans for Executive Officers" in PP&L Resources' 1999 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1998, and which information is incorporated herein by reference. Information for this item for PP&L will be set forth in the sections entitled "Compensation of Directors," "Summary Compensation Table" and "Retirement Plans for Executive Officers" in PP&L's 1999 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1998, and which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------- Information for this item for PP&L Resources will be set forth in the section entitled "Stock Ownership" in PP&L Resources' 1999 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1998, and which information is incorporated herein by reference. Information for this item for PP&L will be set forth in the section entitled "Stock Ownership" in PP&L's 1999 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1998, and which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ------------------------------------------------------- Information for this item for PP&L Resources will be set forth in the section entitled "Certain Transactions Involving Directors or Executive Officers" in PP&L Resources' 1999 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1998, and which information is incorporated herein by reference. Information for this item for PP&L will be set forth in the section entitled "Certain Transactions Involving Directors or Executive Officers" in PP&L's 1999 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1998, and which information is incorporated herein by reference. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------- (a) The following documents are filed as part of this report: 1. Financial Statements - included in response to Item 8. PP&L RESOURCES, INC. Report of Independent Accountants Consolidated Statement of Income for each of the Three Years Ended December 31, 1998, 1997 and 1996 Consolidated Statement of Cash Flows for each of the Three Years Ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheet at December 31, 1998 and 1997 Consolidated Statement of Shareowners' Common Equity for each of the Three Years Ended December 31, 1998, 1997 and 1996 Consolidated Statement of Preferred Stock at December 31, 1998 and 1997 Consolidated Statement of Company-Obligated Mandatorily Redeemable Securities at December 31, 1998 and 1997 Consolidated Statement of Long-Term Debt at December 31, 1998 and 1997 Notes to Financial Statements PP&L, INC. Report of Independent Accountants Consolidated Statement of Income for each of the Three Years Ended December 31, 1998, 1997 and 1996 Consolidated Statement of Cash Flows for each of the Three Years Ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheet at December 31, 1998 and 1997 Consolidated Statement of Shareowner's Common Equity for each of the Three Years Ended December 31, 1998, 1997 and 1996 Consolidated Statement of Preferred Stock at December 31, 1998 and 1997 Consolidated Statement of Company-Obligated Mandatorily Redeemable Securities at December 31, 1998 and 1997 Consolidated Statement of Long-Term Debt at December 31, 1998 and 1997 Notes to Financial Statements 2. Supplementary Data and Supplemental Financial Statement Schedule - included in response to Item 8. Schedule II - Valuation and Qualifying Accounts and Reserves for the Three Years Ended December 31, 1998 All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto. 3. Exhibits Exhibit Index on page 107. (b) Reports on Form 8-K: The following Reports on Form 8-K were filed during the three months ended December 31, 1998: Report dated October 2, 1998 ---------------------------- Item 5. Other Events Information regarding PP&L Global's acquisition of generating assets and transmission resources of Bangor Hydro-Electric Company. Report dated October 19, 1998 ----------------------------- Item 5. Other Events Information regarding PP&L Resources' projected earnings for 1998 through 2000. Report dated November 2, 1998 ----------------------------- Item 5. Other Events Information regarding PP&L Global's acquisition of Montana generation assets. SHAREOWNER AND INVESTOR INFORMATION ---------------------------------- ANNUAL MEETINGS: The annual meetings of shareowners of PP&L Resources and PP&L are held each year on the fourth Friday of April. The 1999 annual meetings will be held on Friday, April 23, 1999, at Lehigh University's Stabler Arena, at the Goodman Campus Complex located in Lower Saucon Township, outside Bethlehem, PA. PROXY MATERIAL: A proxy statement and notice of PP&L Resources' and PP&L's annual meetings are mailed to all shareowners of record as of February 26, 1999. DIVIDENDS: The 1999 dates for consideration of the declaration of dividends on PP&L Resources common stock and PP&L preferred stock by the board of directors or its finance committee are February 26, May 28, August 27 and November 19. Subject to the declaration, such dividends are paid on the first day of April, July, October and January. Dividend checks are mailed in advance of those dates with the intention that they arrive as close as possible to the payment dates. The 1999 record dates for dividends are expected to be the 10th day of March, June, September and December. DIRECT DEPOSIT OF DIVIDENDS: Shareowners may choose to have their dividend checks deposited directly into their checking or savings account. Quarterly dividend payments are electronically credited on the dividend date, or the first business day thereafter. DIVIDEND REINVESTMENT PLAN: Shareowners may choose to have dividends on their PP&L Resources common stock or PP&L preferred stock reinvested in PP&L Resources common stock instead of receiving the dividend by check. CERTIFICATE SAFEKEEPING: Shareowners participating in the Dividend Reinvestment Plan may choose to have their common stock certificates forwarded to PP&L for safekeeping. LOST DIVIDEND OR INTEREST CHECKS: Dividend or interest checks lost by investors, or those that may be lost in the mail, will be replaced if the check has not been located by the 10th business day following the payment date. TRANSFER OF STOCK OR BONDS: Stock or bonds may be transferred from one name to another or to a new account in the name of another person. Please contact Investor Services regarding transfer instructions. BONDHOLDER INFORMATION: Much of the information and many of the procedures detailed here for shareowners also apply to bondholders. Questions related to bondholder accounts should be directed to Investor Services. LOST STOCK OR BOND CERTIFICATES: Please contact Investor Services for an explanation of the procedure to replace lost stock or bond certificates. PP&L RESOURCES SUMMARY ANNUAL REPORT: Published and mailed in mid-March to all shareowners of record. SHAREOWNER NEWS: an easy-to-read newsletter containing current items of interest to shareowners -- published and mailed at the beginning of each quarter. PERIODIC MAILINGS: Letters regarding new investor programs, special items of interest, or other pertinent information are mailed on a non-scheduled basis as necessary. DUPLICATE MAILINGS: The summary annual report and other investor publications are mailed to each investor account. If you have more than one account, or if there is more than one investor in your household, you may contact Investor Services to request that only one publication be delivered to your address. Please provide account numbers for all duplicate mailings. SHAREOWNER INFORMATION LINE: Shareowners can get detailed corporate and financial information 24 hours a day using the Shareowner Information Line. They can hear timely recorded messages about earnings, dividends and other company news releases; request information by fax; and request printed materials in the mail. The toll-free Shareowner Information Line is 1-800-345-3085. Other PP&L Resources publications, such as the annual and quarterly reports to the Securities and Exchange Commission (Forms 10-K and 10-Q) will be mailed upon request. Another part of this service is an enhanced Internet home page (www.pplresources.com). Shareowners can access PP&L Resources' Securities and Exchange Commission filings, stock quotes and historical performance. Visitors to our website can provide their E-mail address and indicate their desire to receive future earnings or news releases automatically. INVESTOR SERVICES: For any questions you have or additional information you require about PP&L Resources and its subsidiaries, please call the Shareowner Information Line, or write to: George I. Kline Manager-Investor Services PP&L Resources, Inc. Two North Ninth Street Allentown, PA 18101 INTERNET ACCESS: For updated information throughout the year, check out our home page at http://www.pplresources.com. You may also contact Investor Services via E-mail at invserv@papl.com. LISTED SECURITIES: FISCAL AGENTS: NEW YORK STOCK EXCHANGE STOCK TRANSFER AGENTS AND REGISTRARS PP&L RESOURCES, INC.: Norwest Bank Minnesota, N.A. Common Stock (Code: PPL) Shareowner Services 161 North Concord Exchange PP&L, INC.: South St. Paul, MN 55075 4-1/2% Preferred Stock (Code: PPLPRB) PP&L, Inc. 4.40% Series Preferred Stock Investor Services Department (Code: PPLPRA) DIVIDEND DISBURSING OFFICE AND DIVIDEND REINVESTMENT PLAN AGENT PP&L CAPITAL TRUST: PP&L, Inc. 8.20% Preferred Securities Investor Services Department (Code: PPLPRC) MORTGAGE BOND TRUSTEE PP&L CAPITAL TRUST II: Bankers Trust Co. 8.10% Preferred Securities Attn: Security Transfer Unit (Code: PPLPRD) P.O. Box 291569 Nashville, TN 37229 PHILADELPHIA STOCK EXCHANGE PP&L RESOURCES, INC.: BOND INTEREST PAYING AGENT Common Stock PP&L, Inc. Investor Services Department PP&L, INC. 4-1/2% Preferred Stock 3.35% Series Preferred Stock 4.40% Series Preferred Stock 4.60% Series Preferred Stock SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PP&L RESOURCES, INC. -------------------- (Registrant) PP&L, INC. ---------- (Registrant) By /S/ William F. Hecht - ---------------------------------------- William F. Hecht - Chairman, President and Chief Executive Officer (PP&L Resources, Inc. and PP&L, Inc.) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. TITLE ----- By /S/ William F. Hecht Principal Executive - --------------------------------------- Officer and Director William F. Hecht - Chairman, President and Chief Executive Officer (PP&L Resources, Inc. and PP&L, Inc.) By /S/ John R. Biggar Principal Financial - ---------------------------------------- Officer John R. Biggar - Senior Vice President and Chief Financial Officer (PP&L Resources, Inc. and PP&L, Inc.) By /S/ Joseph J. McCabe Principal Accounting - ---------------------------------------- Officer Joseph J. McCabe - Vice President and Controller(PP&L Resources, Inc. and PP&L, Inc.) Frederick M. Bernthal Stuart Heydt E. Allen Deaver Frank A. Long Directors William J. Flood Norman Robertson Elmer D. Gates Marilyn Ware By /S/ William F. Hecht - ---------------------------------------- William F. Hecht, Attorney-in-fact Date: March 3, 1999 EXHIBIT INDEX The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith. The balance of the Exhibits have heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference. Exhibits indicated by a are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K. 3(a)-1 - Articles of Incorporation of PP&L Resources, Inc. (Exhibit B to Proxy Statement of PP&L and Prospectus of Resources, dated March 9, 1995) 3(a)-2 - Restated Articles of Incorporation of PP&L, Inc. (Exhibit A to Proxy Statement of PP&L and Prospectus of Resources, dated March 9, 1995) 3(a)-3 - Articles of Amendment of PP&L, Inc., dated September 12, 1997 (Exhibit 3(a)-3 to PP&L's Form 10-K Report (File No. 1- 905) for the year ended December 31, 1997) 3(b)-1 - By-laws of PP&L Resources, Inc. (Exhibit 3(ii)(a) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 3(b)-2 - By-laws of PP&L, Inc. (Exhibit 3(ii)(b) to PP&L's Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) *4(a)-1 - Amended and Restated Employee Stock Ownership Plan, effective January 1, 1998 *4(a)-2 - Amendment No. 1 to said Employee Stock Ownership Plan, effective January 1, 1998 *4(a)-3 - Amendment No. 2 to said Employee Stock Ownership Plan, effective December 1, 1998 4(b)-1 - Mortgage and Deed of Trust, dated as of October 1, 1945, between PP&L and Guaranty Trust Company of New York, as Trustee (now Bankers Trust Company, as successor Trustee) (Exhibit 2(a)-4 to Registration Statement No. 2-60291) 4(b)-2 - Supplement, dated as of July 1, 1954, to said Mortgage and Deed of Trust (Exhibit 2(b)-5 to Registration Statement No. 219255) 4(b)-3 - Supplement, dated as of October 1, 1989, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated November 6, 1989) 4(b)-4 - Supplement, dated as of July 1, 1991, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated July 29, 1991) 4(b)-5 - Supplement, dated as of May 1, 1992, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated June 1, 1992) 4(b)-6 - Supplement, dated as of November 1, 1992, to said Mortgage and Deed of Trust (Exhibit 4(b)-29 to PP&L's Form 10-K Report (File 1-905) for the year ended December 31, 1992) 4(b)-7 - Supplement, dated as of February 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated February 16, 1993) 4(b)-8 - Supplement, dated as of April 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated April 30, 1993) 4(b)-9 - Supplement, dated as of June 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated July 7, 1993) 4(b)-10 - Supplement, dated as of October 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated October 29, 1993) 4(b)-11 - Supplement, dated as of February 15, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated March 11, 1994) 4(b)-12 - Supplement, dated as of March 1, 1994, to said Mortgage and Deed of Trust (Exhibit 4(b) to PP&L's Form 8-K Report (File No. 1-905) dated March 11, 1994) 4(b)-13 - Supplement, dated as of March 15, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated March 30, 1994) 4(b)-14 - Supplement, dated as of September 1, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K (File No. 1-905) dated October 3, 1994) 4(b)-15 - Supplement, dated as of October 1, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated October 3, 1994) 4(b)-16 - Supplement, dated as of August 1, 1995, to said Mortgage and Deed of Trust (Exhibit 6(a) to PP&L's Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1995) 4(b)-17 - Supplement, dated as of April 1, 1997 to said Mortgage and Deed of Trust (Exhibit 4(b)-17 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1997) 4(b)-18 - Supplement, dated as of May 5, 1998, to said Mortgage and Deed of Trust (Exhibit 4.3 to PP&L's Form 8-K Report (File No. I-905) dated May 1, 1998) 4(c)-1 - Indenture, dated as of November 1, 1997, among PP&L Resources, Inc., PP&L Capital Funding, Inc. and The Chase Manhattan Bank as Trustee (Exhibit 4.1 to PP&L's 8-K (File No. 1-905) dated November 12, 1997) 4(c)-2 - Supplement, dated as of November 1, 1997, to said Indenture (Exhibit 4.2 to PP&L's 8-K (File No. 1-905) dated November 12, 1997) 4(d)-1 - Junior Subordinated Indenture, dated as of April 1, 1997, between PP&L, Inc. and The Chase Manhattan Bank, as Trustee (Exhibit 4.1 to Registration Statement No. 333-20661) 4(d)-2 - Amended and Restated Trust Agreement, dated as of April 8, 1997, among PP&L, Inc., The Chase Manhattan Bank, as Property Trustee, Chase Manhattan Bank (Delaware), as Delaware Trustee, and John R. Biggar and James E. Abel, as Administrative Trustees (Exhibit 4.4 to Registration Statement No. 333-20661) 4(d)-3 - Guarantee Agreement, dated as of April 8, 1997, between PP&L, Inc. and The Chase Manhattan Bank, as Trustee (Exhibit 4.6 to Registration Statement No. 333-20661) 4(e)-1 - Amended and Restated Trust Agreement, dated as of June 13, 1997, among PP&L, Inc., The Chase Manhattan Bank, as Property Trustee, Chase Manhattan Bank (Delaware), as Delaware Trustee, and John R. Biggar and James E. Abel, as Administrative Trustees (Exhibit 4.4 to Registration Statement No. 333-27773) 4(e)-2 - Guarantee Agreement, dated as of June 13, 1997, between PP&L, Inc. and The Chase Manhattan Bank, as Trustee (Exhibit 4.6 to Registration Statement No. 333-27773) *10(a) - Amended and Restated 364-Day Revolving Credit Agreement, dated as of November 19, 1998, among PP&L, Inc., PP&L Capital Funding, Inc. and PP&L Resources, Inc. and the banks named therein 10(b) - Five-Year Revolving Credit Agreement, dated as of November 20, 1997, among PP&L, Inc., PP&L Capital Funding, Inc. and PP&L Resources, Inc. and the banks named therein (Exhibit 10(b) to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1997) *10(c) - Credit Agreement and Guarantee, dated as of July 8, 1998, among PP&L Resources, Inc., PP&L Capital Funding, Inc., and The Chase Manhattan Bank *10(d) - Credit Agreement and Guarantee, dated as of July 8, 1998, among PP&L Resources, Inc., PP&L Capital Funding, Inc. and Citibank, N.A. *10(e) - Credit Agreement and Guarantee, dated as of July 8, 1998, among PP&L Resources, Inc., PP&L Capital Funding, Inc. and First Union National Bank *10(f) - Credit Agreement and Guarantee, dated as of July 8, 1998, among PP&L Resources, Inc., PP&L Capital Funding Inc. and Mellon Bank, N.A. *10(g) - Credit Agreement and Guarantee, dated as of July 8, 1998, among PP&L Resources, Inc., PP&L Capital Funding, Inc. and NationsBank, N.A. 10(h) - Pollution Control Facilities Agreement, dated as of May 1, 1973, between PP&L, Inc. and the Lehigh County Industrial Development Authority (Exhibit 5(z) to Registration Statement No. 2-60834) *10(i) - Amended and Restated Operating Agreement of the PJM Interconnection, L.L.C., dated October 15, 1998 10(j)-1 - Capacity and Energy Sales Agreement, dated March 9, 1984, between PP&L, Inc. and Jersey Central Power & Light Company (Exhibit l0(f)-3 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1984) 10(j)-2 - First Supplement, effective February 28, 1986, to said Capacity and Energy Sales Agreement (Exhibit 10(e)-4 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1986) 10(j)-3 - Second Supplement, effective January 1, 1987, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-3 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(j)-4 - Amendments to Exhibit A, effective October 1, 1987, to said Capacity and Energy Sales Agreement (Exhibit 10(e)-6 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1987) 10(j)-5 - Third Supplement, effective December 1, 1988, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-5 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(j)-6 - Fourth Supplement, effective December 1, 1988, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-6 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(k)-1 - Capacity and Energy Sales Agreement, dated January 28, 1988, between PP&L, Inc. and Baltimore Gas and Electric Company (Exhibit 10(e)-7 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1987) 10(k)-2 - First Supplement, effective November 1, 1988, to said Capacity and Energy Sales Agreement (Exhibit 10(i)-2 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(k)-3 - Second Supplement, effective June 1, 1989, to said Capacity and Energy Sales Agreement (Exhibit 10(i)-3 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(k)-4 - Third Supplement, effective June 1, 1991, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-4 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991) 10(k)-5 - Fourth Supplement, effective June 1, 1992, to said Capacity and Energy Sales Agreement (Exhibit 10(h)-5 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1997) 10(k)-6 - Fifth Supplement, effective July 15, 1993, to said Capacity and Energy Sales Agreement (Exhibit 10(h)-6 to PP&L's Form 10- K Report (File No. 1-905) for the year ended December 31, 1997) 10(k)-7 - Sixth Supplement, effective June 1, 1993, to said Capacity and Energy Sales Agreement (Exhibit 10(h)-7 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1997) *10(l) Amended and Restated Directors Deferred Compensation Plan, effective January 1, 1998 *10(m)-1 Amended and Restated Officers Deferred Compensation Plan, effective January 1, 1998 *10(m)-2 Amendment No. 1 to said Officers Deferred Compensation Plan, effective September 14, 1998 *10(n)-1 Amended and Restated Supplemental Executive Retirement Plan, effective January 1, 1998 *10(n)-2 Amendment No. 1 to said Supplemental Executive Retirement Plan, effective September 1, 1998 10(o)-1 Amended and Restated Incentive Compensation Plan, effective January 1, 1995 (Exhibit D to Proxy Statement of PP&L and Prospectus of Resources, dated March 9, 1995) 10(o)-2 - Amendment No. 1 to said Amended and Restated Incentive Compensation Plan, effective April 27, 1995 (Exhibit 10(m)-2 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1995) 10(o)-3 - Amendment No. 2 to said Amended and Restated Incentive Compensation Plan, effective January 1, 1996 (Exhibit 10(o)-3 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1996) 10(o)-4 - Amendment No. 3 to said Amended and Restated Incentive Compensation Plan, effective January 1, 1997 (Exhibit 10(o)-4 to PP&L, Inc.'s Form 10-K Report (File No. 1-905) for the year ended December 31, 1996) 10(p) - Description of Executive Incentive Compensation Award Program (Exhibit 10(p) to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1996)/1/ *10(q) - Terry H. Hunt Employment Agreement, dated as of October 1, 1998, among PP&L Resources, Inc., Terry H. Hunt and Penn Fuel Gas, Inc. 10(r) - Form of Severance Agreement entered into between PP&L Resources and Officers (Exhibit 10 to PP&L Resources' Form 10- Q Report (File No. 1-905) for the quarter ended June 30, 1998) 10(s) - Nuclear Fuel Lease, dated as of February 1, 1982, between PP&L, as lessee, and Newton I. Waldman, not in his individual capacity, but solely as Cotrustee of the Pennsylvania Power & Light Energy Trust, as lessor (Exhibit 10(g) to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1981) 10(t)-1 - Asset Purchase Agreement between PP&L Global, Inc. and The Montana Power Company (Exhibit 10(a) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(t)-2 - Equity Contribution Agreement among PP&L Resources, Inc., PP&L Global Inc. and The Montana Power Company (Exhibit 10(b) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(u)-1 - Asset Purchase Agreement between PP&L Global, Inc. and Portland General Electric Company (Exhibit 10(c) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) - ------------------- /1/ This description is provided pursuant to 17 C.F.R.(S)229.601(b)(10)(iii)(A). 10(u)-2 - Equity Contribution Agreement among PP&L Resources, Inc., PP&L Global, Inc. and Portland General Electric Company (Exhibit 10(d) to PP&L's Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(v)-1 - Asset Purchase Agreement between PP&L Global, Inc. and Puget Sound Energy, Inc. (Exhibit 10(e) to PP&L's Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(v)-2 - Equity contribution Agreement among PP&L Resources, Inc., PP&L Global, Inc. and Puget Sound Energy, Inc. (Exhibit 10(f) to PP&L's Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) *10(w)-1 - Asset Purchase Agreement, dated as of September 25, 1998 among PP&L Global, Inc., Penobscot Hydro Co., Inc., and Bangor Hydro-Electric Company *10(w)-2 - Equity Contribution Agreement, dated as of September 25, 1998, among PP&L Global, Inc., PP&L Resources, Inc., Penobscot Hydro Co., Inc. and Bangor Hydro-Electric Company *12(a) - PP&L Resources, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges *23 - Consent of PricewaterhouseCoopers LLP *24 - Power of Attorney *27 - Financial Data Schedule EX-4.(A).1 2 AMENDED AND RESTATED ESOP (1/1/98) Exhibit 4(a)_1 PP&L EMPLOYEE STOCK OWNERSHIP PLAN EFFECTIVE JANUARY 1, 1975 Amended and Restated Effective January 1, 1998 PP&L EMPLOYEE STOCK OWNERSHIP PLAN EFFECTIVE JANUARY 1, 1975 TABLE OF CONTENTS ----------------- ARTICLE PAGE - ------- ---- I. PURPOSE....................................................... I-1 II. DEFINITIONS................................................... II-1 2.1 Account.................................................. II-1 2.2 Additional Investment Credit............................. II-1 2.3 Affiliated Company or Affiliated Companies............... II-1 2.4 Average Contribution Percentage.......................... II-1 2.5 Board of Directors....................................... II-2 2.6 Code..................................................... II-2 2.7 Compensation............................................. II-2 2.8 Contribution Percentage.................................. II-3 2.9 Credited Service......................................... II-3 2.10 Deferred Savings Plan.................................... II-4 2.11 Dividend-based Contribution.............................. II-4 2.12 Effective Date........................................... II-4 2.13 Eligible Employee........................................ II-4 2.14 Employee................................................. II-4 2.15 Employee Benefit Plan Board.............................. II-4 2.16 Employee Savings Plan.................................... II-4 2.17 ERISA.................................................... II-5 2.18 Fund..................................................... II-5 2.19 Highly Compensated Eligible Employee..................... II-5 2.20 Hour of Service.......................................... II-6 2.21 Limitation Year.......................................... II-7 2.22 Matching Contributions................................... II-7 2.23 Market Value............................................. II-7 2.24 Officer.................................................. II-7 2.25 Participant.............................................. II-7 2.26 PAYSOP Contributions..................................... II-7 i 2.27 Plan..................................................... II-8 2.28 Plan Year................................................ II-8 2.29 PP&L..................................................... II-8 2.30 Qualified Military Service............................... II-8 2.31 Resources................................................ II-8 2.32 Retirement Plan.......................................... II-8 2.33 Returning Veteran........................................ II-8 2.34 Spouse................................................... II-8 2.35 Stock.................................................... II-8 2.36 Total Disability......................................... II-8 2.37 TRASOP Contributions..................................... II-8 2.38 Trust or Trust Agreement................................. II-9 2.39 Trustee.................................................. II-9 2.40 Uniformed Services....................................... II-9 2.41 Valuation Date........................................... II-9 III. ELIGIBILITY.................................................... III-1 3.1 Eligibility............................................... III-1 3.2 Participation............................................. III-2 3.3 Reemployment after Break of Service....................... III-2 3.4 Officers, Directors, and Shareholders..................... III-2 3.5 Rights Affected........................................... III-2 3.6 Data...................................................... III-2 IV. CONTRIBUTIONS TO THE FUND...................................... IV-1 4.1 TRASOP Contributions...................................... IV-1 4.2 Matching Contributions.................................... IV-3 4.3 PAYSOP Contributions...................................... IV-4 4.4 Dividend-based Contribution............................... IV-5 4.5 Investment in Stock....................................... IV-5 4.6 Limitation on Matching Contributions and TRASOP Contributions.................................. IV-5 4.7 Prevention of Violation of Limitation on Matching Contributions and TRASOP Contributions............................................ IV-7 4.8 Suspension of Matching Contributions...................... IV-9 V. ALLOCATION..................................................... V-1 5.1 Accounts.................................................. V-1 5.2 Allocation of Contributions............................... V-1 5.3 Allocation of Earnings.................................... V-3 ii 5.4 Special Allocation Rule................................... V-4 5.5 Maximum Allocation........................................ V-4 VI. PARTICIPANTS' ACCOUNTS......................................... VI-1 6.1 Accounts.................................................. VI-1 6.2 Valuation................................................. VI-1 6.3 Accounting for Allocations................................ VI-1 iii VII. DISTRIBUTION.................................................... VII-1 7.1 General.................................................... VII-1 7.2 Death...................................................... VII-1 7.3 Beneficiary Designation.................................... VII-1 7.4 Disability................................................. VII-3 7.5 Termination of Employment.................................. VII-3 7.6 Valuation for Distribution................................. VII-4 7.7 Timing of Distribution..................................... VII-4 7.8 Mode of Distribution....................................... VII-5 7.9 Withdrawals................................................ VII-6 7.10 Optional Direct Transfer of Eligible Rollover Distributions............................ VII-7 VIII. ADMINISTRATION.................................................. VIII-1 8.1 Administration by Employee Benefit Plan Board...................................................... VIII-1 8.2 Duties and Powers of Employee Benefit Plan Board........... VIII-2 8.3 Reliance on Reports and Certificates....................... VIII-4 8.4 Functions.................................................. VIII-4 8.5 Indemnification of the Employee Benefit Plan Board......... VIII-4 8.6 Allocation of Fiduciary Responsibilities................... VIII-5 IX. THE FUND................................................... IX-1 9.1 Designation of Trustee..................................... IX-1 9.2 Exclusive Benefit.......................................... IX-1 9.3 No Interest in Fund........................................ IX-1 9.4 Trustee.................................................... IX-1 9.5 Expenses................................................... IX-1 X. AMENDMENT OR TERMINATION OF THE PLAN............................ X-1 10.1 Amendment................................................. X-1 10.2 Termination............................................... X-1 10.3 Special Rule.............................................. X-2 10.4 Merger.................................................... X-3 iv XI. TOP HEAVY PROVISIONS............................................ XI-1 11.1 General............................................... XI-1 11.2 Definitions........................................... XI-1 (a) "Aggregation Group"................................... XI-1 (b) "Determination Date".................................. XI-2 (c) "Key Employee"........................................ XI-2 (d) "Key Employee Ratio".................................. XI-3 (e) "Non-Key Employee".................................... XI-5 (f) "Super Top Heavy Plan"................................ XI-5 (g) "Top Heavy Plan"...................................... XI-5 11.3 Minimum Contributions for Non-Key Employees............................................. XI-5 11.4 Social Security....................................... XI-7 11.5 Adjustment to Maximum Allocation Limitation............................................ XI-7 XII. GENERAL PROVISIONS.............................................. XII-1 12.1 No Employment Rights.................................. XII-1 12.2 Source of Benefits.................................... XII-1 12.3 Governing Law......................................... XII-1 12.4 Spendthrift Clause.................................... XII-1 12.5 Incapacity............................................ XII-2 12.6 Gender and Number..................................... XII-3 12.7 Voting or Tendering Shares............................ XII-3 12.8 Use of Loan Proceeds.................................. XII-6 12.9 Put Option............................................ XII-6 12.10 Compliance with Rule 16b-3............................ XII-8 XIII. TREATMENT OF RETURNING VETERANS 13.1 Applicability and Effective Date...................... XIII-1 13.2 Eligibility to Participate............................ XIII-1 13.3 Restoration of TRASOP, PAYSOP, and Dividend-based Contributions.......................... XIII-1 13.4 Restoration of Matching Contributions................. XIII-2 13.5 Determination of Compensation......................... XIII-2 13.6 Application of Certain Limitations.................... XIII-3 13.7 Administrative Rules and Procedures................... XIII-3 v WHEREAS, PP&L, Inc. ("PP&L") adopted the PP&L Employee Stock Ownership Plan, effective January 1, 1975, for certain of its employees; and WHEREAS, PP&Ldesires to amend and restate the PP&L Employee Stock Ownership Plan; NOW, THEREFORE, effective January 1, 1998, except as may be provided to the contrary herein, the PP&L Employee Stock Ownership Plan is continued, amended and restated as hereinafter set forth: ARTICLE I PURPOSE ------- 1.1 The purpose of this Plan is (a) to provide for a portion of the present and future capital needs of PP&L (b) to provide Employees some ownership of stock of PP&L Resources, Inc., substantially in proportion to their relative incomes, without requiring any reduction in pay or other employee benefits, or the surrender of any other rights on the part of Employees, and (c) to invest primarily in the stock of PP&L Resources, Inc. I-1 ARTICLE II DEFINITIONS ----------- 2.1 "ACCOUNT" shall mean the separate record maintained at the direction of the Employee Benefit Plan Board which represents the individual interest of a Participant in the Fund. 2.2 "ADDITIONAL INVESTMENT CREDIT" shall mean that portion of the investment tax credit provided for under the Code which is allowable as a tax credit by reason of the fact that PP&L will make a contribution to the Plan equal in amount thereto and shall include (a) the one percent (1%) additional investment tax credit which is allowable without regard to Matching Contributions by Participants and (b) the one-half percent (0.5%) additional investment tax credit which is allowable if Matching Contributions are made by Participants. 2.3 "AFFILIATED COMPANY" OR "AFFILIATED COMPANIES" shall mean (a) such subsidiaries of PP&L (or companies under common control with PP&L) which would qualify as includible corporations within the meaning of section 1563(a) of the Code; (b) such trades or businesses under common control with PP&L, as determined under section 414(c) of the Code; and (c) such members of an affiliated service group, as determined under section 414(m) of the Code, of which PP&L is a member. "50% AFFILIATED COMPANY" shall mean an Affiliated Company, but with the phrase "more than 50%" substituted for the phrase "at least 80%" of section 1563(a) of the Code. 2.4 "AVERAGE CONTRIBUTION PERCENTAGE" shall mean for a specified group of Eligible Employees for a Plan Year the average of the Contribution Percentages for II-1 such Eligible Employees for the Plan Year. 2.5 "BOARD OF DIRECTORS" shall mean the Board of Directors of PP&L or the Executive Committee of the Board of Directors with respect to any powers which have been assigned thereto by the Board of Directors. 2.6 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time or any predecessor or successor thereto. 2.7 "COMPENSATION" shall mean the annual compensation received by an Employee from PP&Las reported on Internal Revenue Service Form W-2 or a successor form plus the Employee's elective deferrals under the Employee Savings Plan or Deferred Savings Plan; provided, however, that Compensation shall not include fringe benefits not normally included in compensation, such as tuition refunds, moving expenses, etc. and shall not, for purposes of allocation under Section 5.2(a), include any amount in excess of (i) for the 1975 and 1976 Plan Years, $16,000 and (ii) commencing with the 1977 Plan Year, the median annual compensation of all Participants during the Plan Year or $100,000, whichever is less. Such median compensation shall be determined as of the close of a Plan Year and shall be rounded to an even thousand dollars. For an Employee classified as a Managers Compensation Plan employee, Compensation shall also include the full amount of any single-sum award paid to the Participant from the fund credited annually with a percentage of annualized base pay salaries in accordance with the Managers Compensation Plan. 2.8 "CONTRIBUTION PERCENTAGE" shall mean the ratio of (a) the sum of an Eligible II-2 Employee's Matching Contributions and TRASOP Contributions under section 4.1(b) for the Plan Year, plus such other amounts required or (at the election of the Employee Benefit Plan Board) permitted to be taken into account in accordance with section 401(m) of the Code and governmental regulations thereunder, including in the case of a Highly Compensated Eligible Employee, (1) any employee contributions and employer matching contributions for the year under any other qualified retirement plan maintained by PP&L or any Affiliated Company, and (2) at the election of the Employee Benefit Plan Board, any portion of the Eligible Employee's elective deferrals for the year under any other qualified retirement plan maintained by PP&L or any Affiliated Company that may be disregarded without causing such plan to fail to satisfy the requirements of section 401(k)(3) of the Code, as adjusted in accordance with governmental regulations for purposes of Section 4.6(b), to (b) the Eligible Employee's compensation (as defined in section 414(s) of the Code, but subject to the limitation of section 401(a)(17) of the Code) for the Plan Year. 2.9 "CREDITED SERVICE" shall mean that portion of an Employee's employment with PP&L and all Affiliated Companies which is used to calculate the Employee's eligibility for participation and vesting status hereunder. 2.10 "DEFERRED SAVINGS PLAN" shall mean the PP&L Deferred Savings Plan for Managers Compensation Plan Employees. 2.11 "DIVIDEND-BASED CONTRIBUTION" shall mean the contribution made by PP&L or Resources in accordance with Section 4.4. 2.12 "EFFECTIVE DATE" shall mean January 1, 1998, the effective date of this II-3 amended and restated Plan, except as provided to the contrary herein. The Plan was effective originally on January 1, 1975. 2.13 "ELIGIBLE EMPLOYEE" shall mean an Employee who has satisfied the eligibility requirements of Section 3.1. 2.14 "EMPLOYEE" shall mean, effective November 6, 1997, any person classified by PP&L as an employee of PP&L, including officers, shareholders, or directors who are employees, but excluding: (a) persons covered by a collective bargaining agreement unless such agreement specifically provides for participation under the Retirement Plan; (b) persons classified by PP&Las independent contractors, regardless of whether they are subsequently determined to be employees for employment tax or any other purpose; (c) persons classified by PP&L as leased employees, whether or not as described in section 414(n) of the Code; (d) persons classified by PP&L as specific professional employees, cooperative associates, or college interns, as those terms are defined under PP&L policy. 2.15 "EMPLOYEE BENEFIT PLAN BOARD" shall mean the Board described in Article VIII. 2.16 "EMPLOYEE SAVINGS PLAN" shall mean the PP&L Employee Savings Plan. 2.17 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 2.18 "FUND" shall mean the separate fund established for this Plan, II-4 administered under the Trust Agreement, out of which benefits payable under this Plan shall be paid. 2.19 "HIGHLY COMPENSATED ELIGIBLE EMPLOYEE" shall mean an Eligible Employee who: (a) is a five-percent owner, as defined in section 416(i) of the Code, either for the current Plan Year or the immediately preceding Plan Year; or (b) (1) received more than $80,000 (as indexed) in Compensation from PP&L or an Affiliated Company in the immediately preceding Plan Year, and (2) if so elected by PP&L, was among the top 20% of Employees of PP&Land Affiliated Companies ranked by Compensation (excluding Employees described in section 414(q)(5) of the Code to the extent (A) permitted under the Code and regulations thereunder and (B) elected by the Employee Benefit Plan Board, for purposes of identifying the number of Employees in the top 20%). For purposes of this Section 2.20 "compensation" shall have the meaning set forth in section 415(c)(3) of the Code, but including amounts that would be excluded from an Employee's gross income under a plan described in section 125, 401(k) or 403(b) of the Code. 2.20 "HOUR OF SERVICE" shall mean an hour for which: (a) an employee is directly or indirectly paid or entitled to payment by PP&L or an Affiliated Company for the performance of employment duties; (b) back pay, irrespective of mitigation of damages, is either awarded or agreed to; or II-5 (c) an employee is directly or indirectly paid or entitled to payment by PP&L or an Affiliated Company on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence. There shall be excluded from the foregoing those periods during which payments are made or due under a plan maintained solely for the purpose of complying with applicable workers' for the compensation, unemployment compensation or disability insurance laws. No more than 501 Hours of Service shall be credited under Subsection (c) on account of any single continuous period during which no duties are performed except to the extent otherwise provided in this Plan. An Hour of Service shall not be credited where an employee is being reimbursed solely for medical or medically related expenses. An Hour of Service shall be credited in accordance with the rules set forth in U.S. Department of Labor Reg. (S)2530.200b-2(b) and (c). Hours of Service shall also be credited for any individual who is considered a leased employee for purposes of this Plan under section 414(n) of the Code. Notwithstanding the foregoing, Hours of Service shall be credited for an employee for whom no records of hours are maintained on the basis of 45 Hours of Service for each week of employment. 2.21 "LIMITATION YEAR" shall mean the Plan Year or such other twelve- consecutive-month period as may be designated by PP&L. 2.22 "MATCHING CONTRIBUTIONS" shall mean the contributions made by Participants in accordance with Section 4.2. II-6 2.23 "MARKET VALUE" shall mean, with respect to the Stock the average of the closing prices of the Stock based on consolidated trading as defined by the Consolidated Tape Association and reported as part of the consolidated trading prices of New York Stock Exchange listed securities for the twenty consecutive trading days immediately preceding the date on which the Stock is contributed to the Plan. 2.24 "OFFICER" shall mean those persons who are defined as officers in Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934. 2.25 "PARTICIPANT" shall mean an Employee entitled to participate in this Plan under Article III hereof or any former Employee for whom an Account is maintained under the Plan. 2.26 "PAYSOP CONTRIBUTIONS" shall mean the contributions made by PP&L in accordance with Section 4.3. 2.27 "PLAN" shall mean the PP&L Employee Stock Ownership Plan, an employee stock ownership plan within the meaning of section 4975(e)(7) of the Code, as set forth herein and as hereafter amended from time to time. 2.28 "PLAN YEAR" shall mean the fiscal year of PP&L, which shall commence each January 1 and end on the next following December 31. 2.29 "PP&L" shall mean PP&L, Inc. and its successors. 2.30 "QUALIFIED MILITARY SERVICE" means any service (either voluntary or involuntary) by an individual in the Uniformed Services if such individual is entitled to reemployment rights with PP&L with respect to such service. 2.31 "RESOURCES" shall mean PP&L Resources, Inc. and its successors. II-7 2.32 "RETIREMENT PLAN" shall mean the PP&L Retirement Plan. 2.33 "RETURNING VETERAN" means a former Employee who on or after December 12, 1994, returns from Qualified Military Service to employment by PP&L within the period of time during which his reemployment rights are protected by law. 2.34 "SPOUSE" shall mean the person to whom a Participant is married on any date of reference. 2.35 "STOCK" shall mean the common stock of Resources. 2.36 "TOTAL DISABILITY" shall mean a disability of a nature which renders a Participant eligible to participate in PP&L's Long Term Disability Plan. 2.37 "TRASOP CONTRIBUTIONS" shall mean the contributions made by PP&L in accordance with Sections 4.1(a) and 4.1(b). 2.38 "TRUST" or "TRUST AGREEMENT" shall mean the Agreement and Declaration of Trust, if any, executed under this Plan. 2.39 "TRUSTEE" shall mean the corporate Trustee or one or more individuals collectively appointed and acting under the Trust Agreement, if any. 2.40 "UNIFORMED SERVICES" means the Armed Forces, the Army National Guard and Air National Guard (when engaged in active duty for training, inactive duty training, or full-time National Guard duty), the commissioned corps of the Public Health Service, and any other category of persons designated by the President of the United States in time of war or emergency. 2.41 "VALUATION DATE" shall mean the last day of each Plan Year and each interim date on which a valuation of the Fund is made. II-8 ARTICLE III ELIGIBILITY ----------- 3.1 ELIGIBILITY. (a) All persons who were participants in the Plan immediately prior to the Effective Date and who are in the employ of PP&L on the Effective Date shall be Participants hereunder as of such date. All Employees as of the Effective Date (but who are not eligible to participate under the preceding sentence) who have completed one year of Credited Service shall be Participants as of that date. Other Employees shall become Participants on the first day of the calendar month next following the date on which an Employee completes one year of Credited Service, or if later, on which an individual becomes an Employee. A "year of Credited Service," for the purposes of this Article, shall require completion of at least 1,000 Hours of Service during the 12 months from commencement of employment. An Employee who fails to complete 1,000 Hours of Service during his initial 12 months of employment shall complete a year of Credited Service as of the end of any Plan Year in which he completes 1,000 Hours of Service; provided, however, that the first Plan Year during which such Employee shall have the opportunity to complete such 1,000 Hours of Service shall include the anniversary of his commencement of employment. (b) An Employee may elect in writing not to become a Participant by filing such election with the Employee Benefit Plan Board. 3.2 PARTICIPATION. A Participant shall share in contributions under Article V for any Plan Year during which he (a) completes at least one Hour of Service and (b) III-1 receives Compensation. A Participant shall cease to be a Participant on the date on which his entire Account is distributed to him. Notwithstanding the foregoing, for Plan Year 1990, any Participant who is totally and permanently disabled shall share in contributions under Article V. 3.3 REEMPLOYMENT AFTER BREAK OF SERVICE. In the event a Participant ceases to be an Employee and subsequently again becomes an Employee, he shall be readmitted as a Participant as of the date of his reemployment. 3.4 OFFICERS, DIRECTORS, AND SHAREHOLDERS. Officers, directors, and shareholders of PP&L who are Participants shall participate in the Plan on the same basis as other Participants. 3.5 RIGHTS AFFECTED. Except as expressly provided to the contrary in the Plan, any former Employee who has retired or whose employment has terminated before the Effective Date shall receive no additional rights as a result of this amended and restated Plan, but shall have his rights and benefits determined solely under the Plan as it existed prior to the Effective Date. However, any former Employee who has terminated employment and who is reemployed as an Employee after the Effective Date shall have the rights and benefits provided hereunder. 3.6 DATA. Each Participant shall furnish to the Employee Benefit Plan Board such data as may be considered necessary by the Employee Benefit Plan Board for the determination of his rights and benefits under the Plan. III-2 ARTICLE IV CONTRIBUTIONS TO THE FUND ------------------------- 4.1 TRASOP CONTRIBUTIONS. (a) With respect to each Plan Year, PP&L shall contribute to the Plan an amount equal to the one percent (1%) Additional Investment Credit claimed on its United States corporation income tax return for such Plan Year which is allowable without regard to whether Matching Contributions are made by Participants. (b) Commencing with the 1977 Plan Year, PP&L shall also contribute, with respect to each Plan Year, an amount equal to the one-half percent (0.5%) Additional Investment Credit claimed on its United States corporation income tax return for such Plan Year which is allowable if Matching Contributions are made by Participants. (c) Contributions pursuant to this Section 4.1 shall be made within 30 days following the due date (including extensions of time) for filing PP&L's United States corporation income tax return for such Plan Year; provided, however, that if the Additional Investment Credit cannot be utilized in such Plan Year and results in a carryover to future years, the contribution with respect to the Additional Investment Credit carried over may be made no later than 30 days after the due date (including extensions of time) for filing PP&L's federal corporation income tax return for the Plan Year to which such Additional Investment Credit is carried over. (d) If PP&L is subsequently determined to be entitled to an Additional Investment Credit for any Plan Year that is larger than that claimed, PP&L shall contribute, with respect to such Plan Year, an amount equal to the increase in the IV-1 Additional Investment Credit within 30 days of the date such determination becomes final. (e) If PP&L is subsequently determined to be entitled to an Additional Investment Credit that is less than that claimed, or if any Additional Investment Credit is recaptured, PP&L may reduce its contributions for the Plan Year (or any succeeding Plan Year) in which such determination or recapture becomes final by the amount of the reduction in, or recapture of, the Additional Investment Credit. (f) If the aggregate total amount of Matching Contributions by Participants with respect to a Plan Year, determined no later than the close of the second Plan Year following such Plan Year, is less than the aggregate total amount of PP&L's TRASOP Contributions under Section 4.1(b) with respect to such Plan Year, the excess of such TRASOP Contributions over Matching Contributions may be withdrawn from the Plan by PP&L. (g) Notwithstanding the foregoing, PP&L shall not be under any obligation to make any TRASOP Contributions under the Plan with respect to any Plan Year in which it is not entitled to an Additional Investment Credit equal to the amount of such TRASOP Contributions. 4.2 MATCHING CONTRIBUTIONS. (a) Commencing with the 1977 Plan Year, a Participant may elect to make Matching Contributions on a prospective basis, subject to Sections 4.6, 4.7 and 4.8. Such election shall be made on a form prescribed by the Employee Benefit Plan Board and shall specifically designate that the contributions are intended IV-2 to be matched by TRASOP Contributions made by PP&L under Section 4.1(b). (b) The amount that a Participant may contribute as a Matching Contribution with respect to a Plan Year shall be determined by the Employee Benefit Plan Board, subject to Sections 4.6, 4.7 and 4.8. Initially, the amount which may be contributed by each Participant shall bear the same proportion to the total amount which may be contributed under this Section 4.2 as the amount of Compensation paid to such Participant bears to the total Compensation paid to all Participants during such Plan Year. If all Participants do not elect to, or fail to, contribute the maximum amount permitted, the Employee Benefit Plan Board may permit other Participants to elect to increase their contributions proportionately. (c) Matching Contributions by Participants may be made by payroll deductions or in cash and shall be made no later than the close of the second Plan Year following the Plan Year with respect to which they are made; provided, however, if PP&L is determined to be entitled to an Additional Investment Credit that is larger than that claimed, additional Matching Contributions may be made by Participants who are still Employees no later than the second Plan Year following the Plan Year in which such determination becomes final. All Matching Contributions shall be invested in Stock each month. The Employee Benefit Plan Board may prescribe such rules and regulations with respect to Matching Contributions by Participants as it deems desirable. (d) If the aggregate total amount of Matching Contributions by Participants with respect to a Plan Year, determined as of the close of the second Plan Year IV-3 following such Plan Year, is greater than the aggregate total amount of PP&L's TRASOP Contributions under Section 4.1(b) with respect to such Plan Year, each Participant's proportionate share of such excess shall be returned to him. (e) Any election by an Officer to make Matching Contributions must be made not less than six months prior to the allocation of such Matching Contributions to such Officers' account and such election shall be irrevocable. 4.3 PAYSOP CONTRIBUTIONS. (a) For each Plan Year for which a tax credit is allowed under the Code, PP&L may contribute to the Fund an amount up to one-half percent (0.5%) of the Compensation of all Participants for such Plan Year. Such amount shall be paid within 30 days following the due date (including extensions of time) for filing PP&L's federal corporation income tax return for such Plan Year. (b) All PAYSOP Contributions shall remain in the Plan, as allocated, even though all or a part of the employee stock ownership credit for which such contributions may qualify under section 41 of the Code is redetermined. 4.4 DIVIDEND-BASED CONTRIBUTION. Commencing with the 1990 Plan Year, PP&L or Resources may contribute to the Plan an amount determined at the sole discretion of PP&L or Resources relating to the reduction in taxes arising out of the payment of dividends to participants and the contribution thereof to the Plan. The Dividend-based Contribution is in addition to contributions made pursuant to Sections 4.1, 4.2 and 4.3. All contributions by PP&L are expressly conditioned upon their deductibility for federal income tax purposes. IV-4 4.5 INVESTMENT IN STOCK. All TRASOP, PAYSOP, Dividend-based, and Matching Contributions may be in cash or in Stock; provided, however, that (a) if a Contribution is in cash, the Trustee shall use such Contribution to purchase Stock from Resources or others on or before the last day on which the Contribution could have been made under Section 4.1(c) and (b) if a Contribution is in Stock, the number of shares contributed will be determined by the Market Value of the Stock. 4.6 LIMITATION ON MATCHING CONTRIBUTIONS AND TRASOP CONTRIBUTIONS. (a) For any Plan Year, the Average Contribution Percentage for the Highly Compensated Eligible Employees shall not exceed the greater of (1) or (2) as follows: (1) The Average Contribution Percentage for all other Eligible Employees, multiplied by one hundred twenty-five percent (125%); or (2) The Average Contribution Percentage for all other Eligible Employees, multiplied by two hundred percent (200%); provided, however, the Average Contribution Percentage for the Highly Compensated Eligible Employees may not exceed the Average Contribution Percentage for all other Eligible Employees by more than two percentage points. (b) Effective January 1, 1989, for any Plan Year in which a Participant in this Plan is also a participant in any other qualified retirement plan maintained by PP&L or any Affiliated Company under which the Participant makes elective deferrals, the sum of the actual deferral percentage (as defined in section 401(k)(3)(B) of the Code and regulations thereunder) and the Average Contribution Percentage for the Highly Compensated Eligible Employees shall not exceed the sum of: IV-5 (1) One hundred twenty-five percent (125%) multiplied by the greater of the actual deferral percentage or the Average Contribution Percentage for all other Eligible Employees; plus (2) The lesser of (A) Two hundred percent (200%) multiplied by the lesser of the actual deferral percentage or the Average Contribution Percentage for all other Eligible Employees; or (B) Two (2) percentage points plus the lesser of the actual deferral percentage or the Average Contribution Percentage for all other Eligible Employees. (c) The application of this Section 4.6 shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 4.7 PREVENTION OF VIOLATION OF LIMITATION ON MATCHING CONTRIBUTIONS AND TRASOP CONTRIBUTIONS. The Employee Benefit Plan Board shall monitor the level of Participants' Matching Contributions and TRASOP Contributions under Section 4.1(b) and elective deferrals, employee contributions, and employer matching contributions under any other qualified retirement plan maintained by PP&L or any Affiliated Company to ensure against exceeding the limitations of Section 4.6 for any Plan Year. If the Employee Benefit Plan Board determines that the limitations of Section 4.6 may be or have been exceeded, it shall take the appropriate following actions for such Plan Year: (a) The Average Contribution Percentage for the Highly Compensated Eligible IV-6 Employees shall be reduced to the extent necessary to satisfy at least one of the tests in Section 4.6(a) and the test in Section 4.6(b). (b) The reduction shall be accomplished by reducing the maximum Contribution Percentage for any Highly Compensated Eligible Employee to an adjusted maximum Contribution Percentage, which shall be the highest Contribution Percentage that would cause one of the tests in Section 4.6(a) and the test in Section 4.6(b) to be satisfied, if each Highly Compensated Eligible Employee with a higher Contribution Percentage had instead the adjusted maximum Contribution Percentage, reducing the Highly Compensated Eligible Employees' Matching Contributions, TRASOP Contributions under Section 4.1(b), and employee contributions and employer matching contributions under any other qualified retirement plan maintained by PP&L or any Affiliated Company in order of priority based on the dollar amount of each Eligible Highly Compensated Employee's Matching Contributions and TRASOP Contributions, beginning with the Highly Compensated Eligible Employee(s) with the highest dollar amount of Matching Contributions and TRASOP Contributions. (c) (1) To the extent practicable, the Employee Benefit Plan Board shall prospectively limit a Highly Compensated Eligible Employee's (A) voluntary employee contributions under the Employee Savings Plan, (B) voluntary employee contributions under the Deferred Savings Plan and (C) Matching Contributions to reduce his Contribution Percentage to his adjusted maximum Contribution Percentage. (2) In addition, not later than two and one half months after the close of the Plan Year for which such contributions were made, the remaining difference IV-7 between a Highly Compensated Eligible Employee's Contribution Percentage and the Highly Compensated Eligible Employee's adjusted maximum contribution Percentage, with earnings attributable thereto, shall be paid to the Highly Compensated Eligible Employee; provided, however, that, for any Participant who is also a Participant in any other qualified retirement plan maintained by PP&L or any Affiliated Company under which the Participant makes elective deferrals or employee contributions or is credited with employer matching contributions for such year, the Employee Benefit Plan Board shall coordinate corrective actions under this Plan and such other plan for the year. 4.8 SUSPENSION OF MATCHING CONTRIBUTIONS. In the event that a Participant takes a withdrawal from his salary reduction account under the Deferred Savings Plan or the Employee Savings Plan prior to his attainment of age 59 1/2, the Participant shall not be permitted to make any additional Matching Contributions under this Plan for a period of twelve (12) months commencing on the date of his receipt of the withdrawal. IV-8 ARTICLE V ALLOCATION ---------- 5.1 ACCOUNTS. A separate Account shall be created for each Participant. Separate subaccounts shall also be maintained with respect to the Stock acquired with (a) TRASOP and PAYSOP Contributions, (b) Matching Contributions and (c) Dividend-based Contributions. Additional subaccounts may be established at the Employee Benefit Plan Board's discretion. 5.2 ALLOCATION OF CONTRIBUTIONS. Contributions made for any Plan Year shall be allocated among the Participants entitled to share in the allocation of contributions pursuant to Section 3.2 in accordance with the following rules. (a) All Stock acquired through TRASOP and PAYSOP Contributions made with respect to a Plan Year under Sections 4.1(a) and 4.3(a) shall be allocated, as of the close of such Plan Year, to the Account of each Participant (who was a Participant at any time during such Plan Year). The amount of such Stock allocated to each Participant's Account shall bear the same proportion to the total amount of such Stock allocated with respect to such Plan Year as the amount of the Compensation paid to such Participant bears to the total Compensation paid to all Participants during such Plan Year. (b) Stock acquired through TRASOP Contributions made with respect to a Plan Year under Section 4.1(b) and dividends thereon, shall be allocated, as of the close of such Plan Year, to the Account of each Participant (who made Matching Contributions for such Plan Year); such allocation shall be made no later than the end V-1 of the second Plan Year following the Plan Year with respect to which such Contributions were made. The amount of such Stock allocated to a Participant's Account as provided by this Section 5.2(b) shall bear the same proportion to the total amount of such Stock allocated with respect to such Plan Year as the amount of Matching Contributions made by such Participant bears to the total Matching Contributions made by all Participants with respect to such Plan Year. (c) Stock acquired with Matching Contributions by Participants shall be allocated to the Accounts of each Participant making such contributions. (d) Subject to Section 5.2(e), Stock acquired with the Dividend-based Contribution made with respect to a Plan Year shall be allocated, as of the close of such Plan Year, as follows: (1) 75% of the Dividend-based Contribution shall be allocated to the Account of each Participant to whom or on whose behalf dividends were paid at any time during the portion of such Plan Year in which the Participant was an Employee. The amount of such Stock allocated to each Participant's Account shall bear the same proportion to the total amount of such Stock allocated with respect to such Plan Year as the amount of dividends paid to such Participant during the portion of the Plan Year in which he was an Employee bears to the total amount of dividends paid to all Participants during the portion of such Plan Year in which they were Employees; and V-2 (2) 25% of the Dividend-based Contribution shall be allocated to the Account of each Participant who was a Participant at any time during such Plan Year. The amount of such Stock allocated to each Participant's Account shall bear the same proportion to the total amount of such Stock allocated with respect to such Plan Year as the amount of the Compensation paid to such Participant bears to the total Compensation paid to all Participants during such Plan Year. (e) In the event the allocation under Section 5.2(d)(1) above for any Plan Year discriminates in favor of the Highly Compensated Eligible Employees, as determined under section 401(a)(4) of the Code and regulations thereunder, then the percentage of the Dividend-based Contribution to be allocated under Section 5.2(d)(1) shall be decreased and the percentage to be allocated under Section 5.2(d)(2) shall be correspondingly increased until the allocation under Section 5.2(d)(1) no longer discriminates in favor of the Highly Compensated Eligible Employees. 5.3 ALLOCATION OF EARNINGS. Any dividends or other distributions on the Stock allocated to a Participant's Account shall be paid no later than 90 days after the close of the Plan Year to the Participant in cash either by the Trustee or directly by PP&L or Resources. 5.4 SPECIAL ALLOCATION RULE. (a) The TRASOP and PAYSOP Contributions shall be allocated in accordance with Section 5.2; however, no more than one-third of TRASOP and PAYSOP Contributions V-3 with respect to a Plan Year may be allocated to the group of Employees consisting of Highly Compensated Eligible Employees. (b) No Participant may receive an allocation under the Dividend-based Contribution provided for in Section 5.2(d) above which equals or exceeds 5% of such Participant's Compensation for the Plan Year for which such allocation is being made. 5.5 MAXIMUM ALLOCATION. The provisions of this Section shall be construed to comply with section 415 of the Code. (a) Notwithstanding anything in this Article to the contrary, in no event shall the sum of (1) any PP&L or Resources contributions and other employer contributions, (2) any forfeitures and (3) the Participant's own contributions, if any, allocated for any Limitation Year to any Participant under this and any other defined contribution plan maintained by PP&L or any 50% Affiliated Company, exceed the lesser of (A) $30,000 plus the lesser of $30,000 or the value of the Stock contributed to the Plan for such Plan Year or (B) twenty-five percent (25%) of any Participant's compensation for the Limitation Year. Amounts described in sections 415(l) and 419A(d)(2) of the Code contributed for any Plan Year for the benefit of any Participant shall be treated as annual additions to the extent provided in such Sections. (b) If the amount otherwise allocable to the accounts of a Participant would exceed the amount described in Section 5.5(a) as a result of a reasonable error in estimating the Participant's Compensation, the Employee Benefit Plan Board shall determine which portion of such excess amount is attributable to the Participant's (1) voluntary employee contributions under the Employee Savings Plan, (2) voluntary V-4 employee contributions under the Deferred Savings Plan, (3) elective deferrals under the Employee Savings Plan, (4) elective deferrals under the Deferred Savings Plan, (5) Matching Contributions under Section 4.2, (6) Company Contributions under the Deferred Savings Plan and (7) TRASOP, PAYSOP, or Dividend-based Contributions under Article IV. (c) Amounts attributable to voluntary employee contributions under the Employee Savings Plan under Section 5.5(b)(1) and earnings thereon shall be returned to the Participant. (d) Amounts attributable to voluntary employee contributions under the Deferred Savings Plan under Section 5.5(b)(2) and earnings thereon shall be returned to the Participant. (e) Amounts attributable to elective deferrals under the Employee Savings Plan under Section 5.5(b)(3) shall be treated as voluntary employee contributions and, along with earnings thereon, returned to the Participant. (f) Amounts attributable to elective deferrals under the Deferred Savings Plan under Section 5.5(b)(4) shall be treated as voluntary employee contributions and, along with earnings thereon, returned to the Participant. (g) Amounts attributable to a Participant's Matching Contributions under Section 5.5(b)(5) and earnings thereon shall be returned to the Participant. (h) Amounts attributable to Company Contributions under the Deferred Savings Plan under Section 5.5(b)(6) will be held in a suspense account until the following Plan Year at which time the amounts will be used to reduce Company Contributions for the V-5 year. (i) Amounts attributable to excess TRASOP, PAYSOP, or Dividend-based Contributions under Section 5.5(b)(7) shall be allocated to the accounts of other Participants in accordance with Section 5.2. Any excess Contributions or Stock purchased with such Contributions which cannot be allocated in a Plan Year to Participants' Accounts shall be held in a suspense account until the Plan Year in which it is first possible to allocate such Contributions or Stock to Participants' Accounts. (j) (1) If in any Limitation Year beginning before January 1, 2000, a Participant in this Plan is also a participant in one or more qualified defined benefit plans maintained by PP&L or any 50% Affiliated Company, the projected annual benefit under such qualified defined benefit plan or plans shall be reduced if necessary, so that the sum of the fractions described in (A) and (B) does not exceed 1.0 for such Limitation Year: (A) DEFINED BENEFIT FRACTION - a fraction, the numerator of which is the Participant's projected annual benefit under the defined benefit pension plans in which he has participated, determined as of the close of the limitation years of such plans, and the denominator of which is the lesser of: (i) 1.25 x $90,000 or (ii) 140% of the Participant's highest average compensation over any three consecutive calendar years. For purposes of this Section, "projected annual benefit" shall mean the annual benefit to which a participant would be entitled under the terms of a qualified defined benefit plan if he had continued employment until his normal retirement date under such plan and if his compensation for the purpose of such plan continued at the same V-6 rate. (B) DEFINED CONTRIBUTION FRACTION - A fraction, the numerator of which is the sum of the annual additions to the Participant's accounts under all defined contribution plans sponsored by PP&L or any 50% Affiliated Company for all limitation years, and the denominator of which is the sum of the lesser of the following amounts, determined for each of such Limitation Years and for each prior limitation year of service with PP&L or 50% Affiliated Company: (i) 1.25 x $30,000 or (ii) 35% of the Participant's compensation for such limitation year. (2) If the Plan and the defined benefit plan referred to in Subsection (j)(1)(A) satisfied section 415 of the Code for the Limitation Year ended December 31, 1986, an amount shall be subtracted from the numerator of the fraction described in Subsection (j)(1)(B) (not exceeding such numerator). The amount to be subtracted shall be the product of: (A) the sum of the defined contribution fraction under Subsection (j)(1)(B) plus the defined benefit fraction under Subsection (j)(1)(A) as of December 31, 1986, minus one, multiplied by (B) the denominator of the defined contribution plan fraction under Subsection (j)(1)(B) as of December 31, 1986. (k)(1) The dollar limitations described in Subsections (a) and (j) shall be adjusted in accordance with governmental regulations prescribing the method and amount of such adjustments. (2) The dollar limitations described in Subsections (a) and (j) shall not V-7 reduce the annual additions to the Accounts of any Participant under the Plan prior to the Effective Date using the applicable maximum dollar limitations then in effect. (l) (1) To the extent that any qualified defined contribution was in existence on July 1, 1982, the Employee Benefit Plan Board may elect to apply Subsection (j)(1)(B) with respect to any Plan Year ending after December 31, 1982, by calculating the denominator under Subsection (j)(1)(B) for all Plan Years ending before January 1, 1983. The alternate amount shall be equal to the amount determined for the denominator under Subsection (j)(1)(B) as in effect for the Plan Year ending in 1982, multiplied by the "transition fraction." (2) The transition fraction shall be a fraction determined as follows: (A) The numerator shall consist of the lesser of: (i) $51,875, or (ii) thirty-five percent (35%) of the Participant's compensation for the Plan Year ending in 1981. (B) The denominator shall consist of the lesser of: (i) $41,500, or (ii) twenty-five percent (25%) of the Participant's compensation for the Plan Year ending in 1981. (m) For the purpose of this Section 5.5, "compensation" shall be defined in accordance with section 415(c)(3) of the Code and regulations thereunder so that, for years beginning on or after January 1, 1998, "compensation" shall also include amounts excluded from gross income under sections 125, 402(e)(3), 402(h)(1)(B) or 403(b). V-8 ARTICLE VI PARTICIPANTS' ACCOUNTS ---------------------- 6.1 ACCOUNTS. All contributions and earnings thereon may be invested in one commingled Fund for the benefit of all Participants. However, in order that the interest of each Participant may be accurately determined and computed, a separate Account shall be maintained for each Participant which shall represent his interest in the Fund. 6.2 VALUATION. The value of each investment medium in the Fund shall be computed by the Trustee as of the close of business on each Valuation Date on the basis of the fair market value of all assets of the Fund. 6.3 ACCOUNTING FOR ALLOCATIONS. The Employee Benefit Plan Board shall provide for the establishment of accounting procedures for the purpose of making the allocations, valuations and adjustments to Participants' Accounts provided for in this Article. From time to time, such procedures may be modified for the purpose of achieving equitable and nondiscriminatory allocations among the Accounts of Participants in accordance with the general concepts of the Plan and the provisions of this Article. VI-1 ARTICLE VII DISTRIBUTION ------------ 7.1 GENERAL. The interest of each Participant in the Fund shall be distributed in the manner, in the amount and at the time provided in this Article, except that in the event of termination of the Plan the provisions of Article X shall govern. Each Participant shall have a nonforfeitable right to all Stock allocated to his Account, except as set forth in Sections 4.1(f), 4.7(c) and 5.5. The provisions of this Article shall be construed in accordance with section 401(a)(9) of the Code and regulations thereunder. 7.2 DEATH. If a Participant dies either while in the employment of PP&L or after termination of employment but prior to the commencement of benefit payments, the full amount of his interest in the Fund shall be paid to the Participant's beneficiary in a single sum. 7.3 BENEFICIARY DESIGNATION. (a) Death benefits under the Plan shall be paid to the surviving Spouse of a Participant, including the Spouse of a Participant who has retired or whose employment has terminated before the Effective Date, (1) unless (A) such Spouse consents in writing not to receive such benefit and consents to the specific beneficiary designated by the Participant, (B) such consent acknowledges its own effect, and (C) such consent is witnessed by a Plan representative or notary public; or (2) unless the Participant establishes to the satisfaction of a Plan representative either that he has no Spouse, that his Spouse cannot be located, or that his Spouse's VII-1 consent is not required under such other circumstances as are prescribed under governmental regulations. (b) Except as provided in this Section, each Participant shall have the unrestricted right at any time to designate the beneficiary or beneficiaries who shall receive, upon or after his death, his interest in the Fund by executing and filing with the Employee Benefit Plan Board a written instrument in such form as may be prescribed by the Employee Benefit Plan Board for that purpose. Except as provided in this Section, the Participant shall have the unrestricted right to revoke and to change, at any time and from time to time, any beneficiaries previously designated by him by executing and filing with the Employee Benefit Plan Board a written instrument in such form as may be prescribed by the Employee Benefit Plan Board for that purpose. No designation, revocation or change of beneficiaries shall be valid and effective unless and until filed with the Employee Benefit Plan Board. If no designation is made, or if the beneficiaries named in such designation predecease the Participant, or if the beneficiary cannot be located by the Employee Benefit Plan Board, the interest of the deceased Participant shall be paid to the surviving spouse or if none, to the Participant's estate. The amount payable upon the death of a Participant shall be paid in Stock or cash as elected by the recipients. 7.4 DISABILITY. (a) If a Participant suffers a Total Disability prior to his termination of employment with PP&L and all Affiliated Companies and is on inactive status on account of such VII-2 Total Disability, the full amount of his interest in the Fund shall be paid to him or applied for his benefit upon Participant's consent in writing to such payment or application following the determination of his Total Disability in accordance with the provisions of this Article VII. (b) Total Disability shall be determined by the Employee Benefit Plan Board which may consult with a medical examiner selected by it. The medical examiner shall have the right to make such physical examinations and other investigations as may be reasonably required to determine Total Disability. 7.5 TERMINATION OF EMPLOYMENT. Upon a Participant's retirement or other termination of employment with PP&L and all Affiliated Companies, he shall be entitled to receive his interest in the Fund. Subject to Subsection 7.7(b), (a) if the value of his interest in the Fund exceeds, or exceeded at the time of any prior distribution, $5,000, his interest shall not be paid to him or applied for his benefit until (1) he consents in writing to such payment or application, or (2) he attains his 65th birthday or (3) he dies; whichever occurs first; (b) otherwise, his interest shall be paid to him or applied for his benefit in a single sum within 60 days after such termination takes place. 7.6 VALUATION FOR DISTRIBUTION. For the purposes of paying the amounts to be distributed to a Participant or his beneficiaries under the provisions of this Article, the value of the Fund and the amount of the Participant's interest shall be determined in accordance with the provisions of Article VI as of the Valuation Date coincident with or next following the event which gives rise to a payment under this Article. There VII-3 shall be added to such amount the additional contributions, if any, which are to be allocated to the Participant's Account pursuant to Article IV. 7.7 TIMING OF DISTRIBUTION. (a) Subject to Subsection (b), a Participant entitled to receive benefits under this Article shall commence to receive benefits as soon as administratively practicable, but in no event shall any Participant receive benefits later than the earliest of the dates determined under (1), (2) or (3) below: (1) the 60th day after the close of the Plan Year in which occurs the later of (A) the Participant's attainment of age 65 or (B) the Participant's termination of employment with PP&L and all Affiliated Companies; (2) the April 1st after the end of the calendar year in which occurs the Participant's attainment of age 70 1/2; or (3) in the event of the Participant's death, December 31 of the calendar year following the year of the Participant's death. (b) A Participant who terminates employment with PP&L on or after age 55, and whose Account exceeds, or exceeded at the time of any prior distribution, $5,000, shall be entitled to defer payment of his benefits until a date not later than that specified in Section 7.7(a)(2). (c) The Employee Benefit Plan Board shall supply to each Participant who is entitled to distribution before his death or attainment of age 65 and the value of whose Account exceeds, or exceeded at the time of any prior distribution, $5,000, written information relating to his right to defer distribution under Section 7.4, 7.5 or VII-4 7.7(b). Such notice shall be furnished not less than 30 days nor more than 90 days prior to the Participant's benefit commencement date, except that such notice may be furnished less than 30 days prior to the Participant's benefit commencement date if (1) the Employee Benefit Plan Board informs the Participant that the Participant has the right to a period of at least 30 days after receiving such notice to consider the decision whether to elect a distribution, and the mode in which he desires such distribution to be made, and (2) the Participant, after receiving such notice, affirmatively elects a distribution. 7.8 MODE OF DISTRIBUTION. The sole form of benefit under Sections 7.2, 7.4 and 7.5 shall be a single sum payment. Any additional Stock which is subsequently allocated to the Participant's Account shall be distributed within 60 days following the date on which such allocation is actually made. At the election of the Participant, all distributions will be either in cash or in full shares of Stock and cash in lieu of fractional shares based on the price at which the Trustee sells such Stock or the fair market value thereof, if the Stock is not sold. 7.9 WITHDRAWALS. (a) A Participant may, by filing a written election with the Employee Benefit Plan Board, withdraw from his Account all Stock which has been allocated with respect to a Plan Year ending at least 84 months prior to the end of the Plan Year in which such election was made. The number of shares eligible for withdrawal during a Plan Year will be determined on or before October 1 of the preceding Plan Year. Elections must be received by the first day of March, June, September or December VII-5 of the year in which the withdrawal is made. Payments of withdrawals under this Subsection 7.9(a) will be made within 60 days following the end of the quarter for which the election is made. (b)(1) Any Participant who has completed at least ten years of participation in the Plan and attained age 55 may elect within 90 days after the close of each Plan Year in the election period (as defined in Subsection (b)(2) below) to withdraw 25% of his Account attributable to Stock acquired by or contributed to the Plan on or after the Effective Date to the extent such portion of his Account exceeds the sum of (A) the amount to which a prior election under this Subsection applies and (B) any amount withdrawn under Subsection (a) pursuant to an election made within 90 days after the close of any Plan Year in the election period. In the case of a Participant's final election, "50%" shall be substituted for "25%" in the preceding sentence to determine the amount the Participant may withdraw. The determination of the date on which Stock is acquired by or contributed to the Plan shall be made in accordance with section 401(a)(28) of the Code and regulations thereunder. (2) The election period for purposes of this Subsection is the six Plan Year period that begins with the Plan Year in which occurs the later of (A) the Participant's attainment of age 55 or (B) the first Plan Year in which the Participant has completed ten years of participation, except that the election period shall not begin before the Effective Date. (3) Payments of withdrawals under this Subsection 7.9(b) will be made within 90 days following the end of the 90-day period during which the VII-6 withdrawal election is made. (c) Notwithstanding the provisions of Section 7.9(a) and (b) above, Officers may not withdraw any Stock which has been in the Plan less than six months. Any election by an Officer to make a withdrawal pursuant to this Section 7.9 must be made not less than six months prior to the date of the withdrawal and such election shall be irrevocable. 7.10 OPTIONAL DIRECT TRANSFER OF ELIGIBLE ROLLOVER DISTRIBUTIONS. (a) Except to the extent otherwise provided by section 401(a)(31) of the Code and regulations thereunder, a Participant or an alternate payee under a Qualified Domestic Relations Order who is the spouse or former spouse of a Participant, entitled to receive a withdrawal or distribution from the Plan may elect to have the Trustee transfer all or a portion of the amount to be distributed directly to: (1) an individual retirement account described in section 408(a) of the Code, (2) an individual retirement annuity described in section 408(b) of the Code (other than an endowment contract), (3) a qualified defined contribution retirement plan described in section 401(a) of the Code, the terms of which permit the acceptance of rollover contributions from this Plan, or (4) an annuity plan described in section 403(a), the terms of which permit the acceptance of rollover contributions from this Plan. A beneficiary entitled to receive a distribution from the Plan who is the spouse of a VII-7 Participant shall have the right to transfer all or a portion of the amount to be distributed directly to a section 408(a) or 408(b) plan described in Subsections (a)(1) and (a)(2) above. (b) the Participant or beneficiary must specify the name of the plan to which the amount is to be transferred, on a form and in a manner prescribed by the Employee Benefit Plan Board. (c) Subsection (a) shall not apply to the following distributions: (1) any distribution of Matching Contributions, (2) any distribution which is one of a series of substantially equal installments over either (1) a period of ten (10) years or more, or (2) a period equal to the life or life expectancy of the Participant or the joint lives or life expectancy of the Participant and his beneficiary, (3) that portion of any distribution after the Participant's Required Beginning Date that is required to be distributed to the Participant by the minimum distribution rules of section 401(a)(9) of the Code, or (4) such other distributions as may be exempted by applicable statute or regulation from the requirements of section 401(a)(31) of the Code. VII-8 ARTICLE VIII ADMINISTRATION -------------- 8.1 ADMINISTRATION BY EMPLOYEE BENEFIT PLAN BOARD. (a) The Plan shall be administered by an Employee Benefit Plan Board, consisting of not more than five persons nor fewer than three persons. Members of the Employee Benefit Plan Board shall be appointed from time to time by the Board of Directors and shall serve at the pleasure of the Board of Directors. Vacancies shall be filled in the same manner as appointments. Any member of the Employee Benefit Plan Board may resign by delivering a written resignation to the Board of Directors or to the Secretary of the Employee Benefit Plan Board effective upon delivery or at any other future date specified therein. (b) The Employee Benefit Plan Board shall elect a chairman from its members and shall appoint a secretary who may be, but need not be, a member of the Employee Benefit Plan Board. The Employee Benefit Plan Board shall not receive any compensation for its services. (c) The Employee Benefit Plan Board may act at a meeting or in writing without a meeting. A majority of the members of the Employee Benefit Plan Board at the time in office shall constitute a quorum for the transaction of business at all meetings and a majority of those present at any meeting shall be required for action. All decisions by the Employee Benefit Plan Board arrived at without a meeting shall be made by the vote or assent of a majority of its members. No member of the Employee Benefit Plan Board may act, vote or otherwise influence a decision of the VIII-1 Employee Benefit Plan Board specifically relating to the Employee Benefit Plan Board member's own participation under the Plan. (d) The Employee Benefit Plan Board may adopt such rules and regulations as it deems desirable for the conduct of its affairs. All rules and decisions of the Employee Benefit Plan Board shall be uniformly and consistently applied. The Employee Benefit Plan Board shall have the final right of interpretation, construction and determination under the Plan and decisions of the Employee Benefit Plan Board are final and conclusive for all purposes. 8.2 DUTIES AND POWERS OF EMPLOYEE BENEFIT PLAN BOARD. In addition to the duties and powers described elsewhere hereunder, the Employee Benefit Plan Board shall have all such powers as may be necessary to discharge its duties hereunder including but not limited to the following specific duties and powers: (a) to retain such consultants, accountants, agents, clerical assistants and attorneys as may be deemed necessary or desirable to render statements, reports and advice with respect to the Plan and to assist the Employee Benefit Plan Board in complying with all applicable rules and regulations affecting the Plan. Any consultants, accountants, or attorneys may be the same as those retained by PP&L; (b) to make such amendments as provided for in Article X; (c) to establish a claims procedure under which each claimant shall receive notice in writing in the event any claim for benefits with respect to a Participant's participation in the Plan has been denied; such notice shall set forth the specific reasons for such denial. Such claims procedure shall also provide an opportunity for VIII-2 full and fair review by the Employee Benefit Plan Board; (d) to enact uniform and nondiscriminatory rules and regulations to carry out the provisions of the Plan; (e) to compute the amount of any distribution payable to a Participant or other amounts payable under the Plan and authorize disbursement from the Fund; (f) to resolve questions or disputes relating to eligibility for distributions or the amount of distributions under the Plan; (g) to interpret the provisions of the Plan; (h) to determine whether any domestic relations order received by the Plan is a qualified domestic relations order as provided in section 414(p) of the Code; (i) to evaluate administrative procedures; and (j) to delegate such duties and powers as the Employee Benefit Plan Board shall determine from time to time to any person or persons or to an administrative committee. To the extent of any such delegation, the delegate shall have the duties, powers, authority, and discretion of the Employee Benefit Plan Board. The Employee Benefit Plan Board shall have the discretionary authority and final right to interpret, construe and make benefit determinations (including eligibility and amount) under the Plan. The decisions of the Employee Benefit Plan Board are final and conclusive for all purposes. 8.3 RELIANCE ON REPORTS AND CERTIFICATES. The members of the Employee Benefit Plan Board and the officers and directors of PP&L and Resources shall be entitled to rely upon all valuations, certificates and reports made by the Trustee or by VIII-3 any duly appointed accountant, and upon all opinions given by any duly appointed legal counsel. 8.4 FUNCTIONS. The Employee Benefit Plan Board shall cause to be maintained such books of account, records and other data as may be necessary or advisable in its judgment for the purpose of the proper administration of the Plan. 8.5 INDEMNIFICATION OF THE EMPLOYEE BENEFIT PLAN BOARD. Each member of the Employee Benefit Plan Board, the Administrative Committee, and each of their designees shall be indemnified by PP&L against expenses (other than amounts paid in settlement to which PP&L does not consent) reasonably incurred by him in connection with any action to which he may be a party by reason of the delegation to him of administrative functions and duties, except in relation to matters as to which he shall be adjudged in such action to be personally guilty of negligence or willful misconduct in the performance of his duties. The foregoing right to indemnification shall be in addition to such other rights as the member of the Employee Benefit Plan Board, the Administrative Committee, and each of their designees may enjoy as a matter of law or by reason of insurance coverage of any kind. Rights granted hereunder shall be in addition to and not in lieu of any rights to indemnification to which the member of the Employee Benefit Plan Board, the Administrative Committee and each of their designees may be entitled pursuant to the bylaws of PP&L. Service on the Employee Benefit Plan Board shall be deemed in partial fulfillment of the Employee Benefit Plan Board member's function as an employee, officer and/or director of PP&L or Resources, if he serves in such other capacity as well. VIII-4 8.6 ALLOCATION OF FIDUCIARY RESPONSIBILITIES. A fiduciary shall have only those specific powers, duties, responsibilities and obligations as are specifically given under this Plan or the Trust Agreement. A fiduciary may serve in more than one fiduciary capacity with respect to the Plan. It is intended that each fiduciary shall be responsible for the proper exercise of the fiduciary's own powers, duties, responsibilities and obligations under this Plan and the Trust Agreement, and generally shall not be responsible for any act or failure to act of another fiduciary. VIII-5 ARTICLE IX THE FUND -------- 9.1 DESIGNATION OF TRUSTEE. PP&L, by appropriate resolution of its Board of Directors, shall name and designate a Trustee and enter into a Trust Agreement with such Trustee. PP&L shall have the power to amend the Trust Agreement, remove the Trustee, and designate a successor Trustee, all as provided in the Trust Agreement. All of the assets of the Plan shall be held by the Trustee for use in accordance with this Plan in providing for the benefits hereunder. 9.2 EXCLUSIVE BENEFIT. Prior to the satisfaction of all liabilities under the Plan in the event of termination of the Plan, no part of the corpus or income of the Fund shall be used for or diverted to purposes other than for the exclusive benefit of Participants and their beneficiaries except as expressly provided in this Plan and in the Trust Agreement. 9.3 NO INTEREST IN FUND. No persons shall have any interest in, or right to, any part of the assets or income of the Fund, except as to and to the extent expressly provided in this Plan and in the Trust Agreement. 9.4 TRUSTEE. The Trustee shall be the fiduciary with respect to management and control of Plan assets held by it and shall have exclusive and sole responsibility for the custody and investment thereof in accordance with the Trust Agreement. 9.5 EXPENSES. All expenses of administration of this Plan shall be paid from the Fund unless they are paid directly by the Participating Companies. IX-1 ARTICLE X AMENDMENT OR TERMINATION OF THE PLAN ------------------------------------ 10.1 AMENDMENT. The Plan may be amended or terminated at any time by or pursuant to action of the board of directors of Resources. In addition, the EBPB may make such amendments to the Plan as it deems necessary or desirable except those amendments which substantially increase the cost of the Plan to PP&L or significantly alter the benefit design or eligibility requirements of the Plan. Except as expressly provided elsewhere in the Plan, prior to the satisfaction of all liabilities with respect to the benefits provided under this Plan, no such amendment or termination shall cause any part of the monies contributed hereunder to revert to PP&L or to be diverted to any purpose other than for the exclusive benefit of Participants and their beneficiaries. No amendment shall have the effect of retroactively depriving Participants of benefits already accrued under the Plan. Upon complete termination of the Plan without establishment or maintenance of a successor plan (other than an employee stock ownership plan as defined in section 4975(e)(7) of the Code), Participants may receive distribution of their Accounts. Amendments to the allocation formulas contained in Article V shall not be made more frequently than once every six months. 10.2 TERMINATION. The Plan and the Fund forming part of the Plan may be terminated or contributions completely discontinued at any time by or pursuant to action of the board of directors of Resources. In the event of a termination, partial termination, or a complete discontinuance of contributions or in the event PP&L is X-1 dissolved, liquidated, or adjudicated a bankrupt, the interest of the Participants, their estates and beneficiaries, shall be nonforfeitable and shall be fully vested, and distributions shall be made to them in full shares of Stock and cash in lieu of fractional shares based on the price at which the Trustee sells such Stock or the fair market value thereof. When all assets have been paid out by the Trustee, the Fund shall cease. Any distribution after termination of the Plan may be made at any time, and from time to time, in whole or in part in full shares of Stock and cash in lieu of fractional shares based on the price at which the Trustee sells such Stock or the fair market value thereof; provided, however, that no Stock may be distributed to a Participant within seven years after the month in which such Stock was allocated to the Participant's Account except in the case of the Participant's retirement, Total Disability, death or other termination of employment with PP&L. In making such distributions, any and all determinations, divisions, appraisals, apportionments and allotments so made shall be final and conclusive. 10.3 SPECIAL RULE. In the event that the Plan is terminated in accordance with Section 10.2, unallocated amounts held in a suspense account described in Section 5.5 shall be allocated among Participants, subject to the limitations of Section 5.5, in the year of termination and amounts which cannot be allocated by reason of the limitations of Section 5.5 may be withdrawn from the Fund and returned to PP&L or Resources. 10.4 MERGER. The Plan shall not be merged with or consolidated with, or its assets be transferred to, any other qualified retirement plan unless each Participant X-2 would (assuming the Plan then terminated) receive a benefit after such merger, consolidation or transfer which is of actuarial value equal to or greater than the benefit he would have received from the value of his Account if the Plan had been terminated on the day before such merger, consolidation or transfer. No amounts shall be transferred to this Plan which would cause the Plan to be a direct or indirect transferee of a plan to which the joint and survivor annuity and pre-retirement survivor annuity requirements of sections 401(a)(11) and 417 of the Code apply. X-3 ARTICLE XI TOP HEAVY PROVISIONS -------------------- 11.1 GENERAL. The following provisions shall apply automatically to the Plan and shall supersede any contrary provisions for each Plan Year in which the Plan is a Top Heavy Plan. It is intended that this Article shall be construed in accordance with the provisions of section 416 of the Code. 11.2 DEFINITIONS. The following definitions shall supplement those set forth in Article II of the Plan: (a) "AGGREGATION GROUP" shall mean: (1) each plan (including a frozen plan or a plan which has been terminated during the 60-month period ending on the Determination Date) of PP&L or an Affiliated Company in which a Key Employee is a participant, (2) each other plan (including a frozen plan or a plan which has been terminated during the 60-month period ending on the Determination Date) of PP&L or an Affiliated Company which enables any plan in which a Key Employee participates to meet the requirements of section 401(a)(4) or 410 of the Code, and (3) each other plan (including a frozen plan or a plan which has been terminated during the 60-month period ending on the Determination Date) of PP&L or an Affiliated Company which is included by the Employee Benefit Plan Board if the Aggregation Group, including such plan, would continue to meet the requirements of sections 401(a)(4) and 410 of the Code. (b) "DETERMINATION DATE" shall mean the last day of the preceding Plan Year, XI-1 except for the first Plan Year, it shall mean the last day of that Plan Year. (c) "KEY EMPLOYEE" shall mean any employee, former employee or beneficiary of either who at any time during the 60-month period ending on the Determination Date is described in subparagraphs 1 through 4 below of this Subsection ll.2(c). Notwithstanding the foregoing, the number of persons described in Subsection (c)(2) for the entire 60-month period shall be limited to 10. (1) an officer of PP&L having annual compensation, as defined in section 414(q)(7) of the Code, from PP&L and all Affiliated Companies for a Plan Year during such period greater than fifty percent (50%) of the amount in effect under section 415(b)(1)(A) of the Code for the calendar year in which such Plan Year ends; (2) one of the ten employees with annual compensation, as defined in section 414(q)(7) of the Code, from PP&L and all Affiliated Companies greater than the amount described in section 415(c)(1)(A) of the Code owning (or considered as owning within the meaning of section 318 of the Code) the largest interests in PP&L or any Affiliated Company, provided that such interest exceeds one-half of one percent (.5%) of the total share ownership of PP&L or Affiliated Company; (3) a five percent (5%) owner of PP&L; or (4) a one percent (1%) owner of PP&L who has annual compensation, as defined in section 414(q)(7) of the Code, from PP&L and all Affiliated Companies, which in the aggregate is in excess of $150,000. The above determinations will be made in accordance with section 416(i) of the Code. No more than fifty (50) employees (or, if less, the greater of three employees XI-2 or ten percent (10%) of the greatest number of employees, including leased employees within the meaning of section 414(n) of the Code, but excluding employees described in section 414(q)(8) of the Code, employed by PP&L and all Affiliated Companies during the 60-month period ending on the Determination Date) shall be treated as officers. (d) "KEY EMPLOYEE RATIO" shall mean the ratio for any Plan Year, calculated as of the Determination Date of such Plan Year, determined by comparing the amount described in Subsection (d)(1) with the amount described in Subsection (d)(2) after deducting from each such amount any portion thereof described in Subsection (d)(3). (1) The sum of (A) the present value of all accrued benefits of Key Employees under all qualified defined benefit plans included in the Aggregation Group, (B) the balances in all of the accounts of Key Employees under all qualified defined contribution plans included in the Aggregation Group, and (C) the amounts distributed from all plans in such Aggregation Group to or on behalf of any Key Employee during the period of five Plan Years ending on the Determination Date, except benefits paid on account of death in excess of the accrued benefit or account balances immediately prior to death. (2) The sum of (A) the present value of all accrued benefits of all participants under all qualified defined benefit plans included in the Aggregation Group, (B) the balances in all of the accounts of all participants under all qualified defined contribution plans included in the Aggregation Group and (C) the amounts distributed from all plans in such Aggregation Group to or on behalf of any participant XI-3 during the period of five Plans Years ending on the Determination Date. (3) The sum of (A) all rollover contributions (or fund to fund transfers) to the Plan by an Employee after December 31, 1983, from a plan sponsored by an employer which is not PP&L or an Affiliated Company, (B) any amount that is included in Subsections (d)(1) and (2) for a person who is a Non- Key Employee as to the Plan Year of reference but who was a Key Employee as to any earlier Plan Year, and (C) for Plan Years beginning after December 31, 1984, any amount that is included in Subsections (d)(1) and (2) for a person who had not performed any services for PP&L during the five-year period ending on the Determination Date. (4) The present value of accrued benefits under all qualified defined benefit plans included in the Aggregation Group shall be determined (A) on the basis of the 1971 TPF&C Forecast Mortality Table and an interest rate of six and one-half percent (6 1/2%) and (B) under the accrual method used for all qualified defined benefit plans maintained by PP&L or any Affiliated Company, if a single method is used for all such plans, or otherwise, the slowest accrual method permitted under section 411 (b) (1) (C) of the Code. (e) "NON-KEY EMPLOYEE" shall mean any person who is an Employee or a former Employee of PP&L or an Affiliated Company in any Plan Year but who is not a Key Employee as to that Plan Year. The term Non-Key Employee shall also include the beneficiaries of such persons. (f) "SUPER TOP HEAVY PLAN" shall mean each plan in an Aggregation Group if, as of the applicable Determination Date, the Key Employee Ratio in the plan exceeds XI-4 ninety percent (90%), determined in accordance with Section 416 of the Code. (g) "TOP HEAVY PLAN" shall mean each plan in an Aggregation Group if, as of the applicable Determination Date, the Key Employee Ratio exceeds sixty percent (60%) determined in accordance with Section 416 of the Code. 11.3 MINIMUM CONTRIBUTIONS FOR NON-KEY EMPLOYEES. (a) In each Plan Year in which the Plan is a Top Heavy Plan, each Eligible Employee who is not a Key Employee (except an Eligible Employee who is not a Key Employee as to the Plan Year of reference but who was a Key Employee as to any earlier Plan Year or an Eligible Employee who is covered by a collective bargaining agreement) and who is actively employed by PP&L on the last day of such Plan Year will receive a total minimum Company Contribution (including forfeitures) under all plans described in Section 11.2(a)(1) and (2) of not less than three percent (3%) of the Eligible Employee's annual compensation as defined in Section 5.5(m). Salary reduction contributions to such plans made on behalf of an Eligible Employee in plan years beginning after December 31, 1984 but before January 1, 1989, shall be deemed to be Company Contributions for the purpose of this Subsection. (b) The percentage set forth in Section 11.3(a) shall be reduced to the percentage at which contributions, including forfeitures are made (or are required to be made) for a Plan Year for the Key Employee for whom such percentage is the highest for such Plan Year. This percentage shall be determined for each Key Employee by dividing the contribution for such Key Employee by his compensation, as defined in Section 5.5(m), for the Plan Year, determined under Section 11.4. All XI-5 defined contribution plans required to be included in an Aggregation Group shall be treated as one plan for the purpose of this Section 11.3; however, this Section 11.3(b) shall not apply to any plan which is required to be included in an Aggregation Group if such plan enables a defined benefit plan in such group to meet the requirements of section 401(a)(4) or section 410 of the Code. (c) If a Non-Key Employee described in Subsection (a), participates in both a defined benefit plan and a defined contribution plan described in Sections 11.2(a)(1) and (2) maintained by PP&L, PP&L is not required to provide such Employee with both the minimum benefit and the minimum contribution. Regulations prescribed by the Secretary of the Treasury shall serve to prevent inappropriate omissions or duplications of minimum benefits or contributions. 11.4 SOCIAL SECURITY. The Plan for each Plan Year in which it is a Top Heavy Plan, must meet the requirements of this Article XI without regard to any Social Security or similar contributions or benefits. 11.5 ADJUSTMENT TO MAXIMUM ALLOCATION LIMITATION. (a) For each Plan Year in which the Plan is (1) a Super Top Heavy Plan or (2) a Top Heavy Plan and the Employee Benefit Plan Board does not make the election described in Subsection (c) and for which a similar election has not been made as to another plan in the Aggregation Group, the 1.25 factor in the defined benefit and defined contribution fractions described in Article V shall be reduced to 1.0. The adjustment described in this Subsection shall not apply to any Participant during the period in which the Participant earns no additional accrued benefit under any defined XI-6 benefit plan and has no employer contributions, forfeitures, or voluntary contributions allocated in his accounts under any defined contribution plan. (b) In the case of any Top Heavy Plan to which Section 5.5(l) applies, "$41,500" shall be substituted for "$51,875" in the calculation of the transition fraction. (c) If, in any Plan Year in which the Plan is a Top Heavy Plan but not a Super Top Heavy Plan, the Aggregation Group described in Sections 11.2(a)(1) and (2) also includes a defined benefit plan, the Employee Benefit Plan Board may elect to use a factor of 1.25 in computing the denominator of the defined benefit and defined contribution fractions described in Article V. In the event of such an election, the minimum Company Contribution described in Section 11.3(a) for each Non-Key Employee who is not covered under a defined benefit plan shall be increased from three percent (3%) to four percent (4%), and the minimum benefit described in Section 11.3(c) for each Non-Key Employee who is covered under a defined benefit plan shall be increased in accordance with the terms of such defined benefit plan. XI-7 ARTICLE XII GENERAL PROVISIONS ------------------ 12.1 NO EMPLOYMENT RIGHTS. Neither the action of PP&L in establishing the Plan, nor any provisions of the Plan, nor any action taken by it or by the Employee Benefit Plan Board shall be construed as giving to any employee of PP&L the right to be retained in its employ, or any right to payment except to the extent of the benefits provided in the Plan to be paid from the Fund. 12.2 SOURCE OF BENEFITS. All benefits payable under the Plan shall be paid or provided for solely from the Fund, and neither PP&L nor Resources assume liability or responsibility therefor. 12.3 GOVERNING LAW. All questions pertaining to the validity, construction and operation of the Plan shall be determined in accordance with the laws of Pennsylvania, except to the extent superseded by ERISA. 12.4 SPENDTHRIFT CLAUSE. (a) No benefit payable at any time under this Plan, and no interest or expectancy herein shall be anticipated, assigned, or alienated by any Participant or beneficiary, or be subject to attachment, garnishment, levy, execution or other legal or equitable process, except for (1) an amount necessary to satisfy a federal tax levy made pursuant to section 6331 of the Code and (2) any benefit payable pursuant to a domestic relations order within the meaning of the Code. (b) Any attempt to alienate or assign such benefit, whether presently or thereafter payable, shall be void. No benefit shall in any manner be liable for or XII-1 subject to the debts or liability of any Participant or beneficiary. If any Participant or beneficiary shall attempt to, or shall, alienate or assign his benefits under the Plan or any part thereof, or if by reason of his bankruptcy or other event happening at any time, such benefits would devolve upon anyone else or would not be enjoyed by him, then the Employee Benefit Plan Board may terminate payment of such benefit and hold or apply it to or for the benefit of the Participant or beneficiary. (c) The Employee Benefit Plan Board shall review any domestic relations order to determine whether it is qualified within the meaning of section 414(p) of the Code. An order shall not be qualified unless it complies with all applicable provisions of the Plan concerning mode of payment and manner of elections. Notwithstanding the preceding sentence and any restrictions on timing of distributions and withdrawals under the Plan, an order may provide for distribution immediately or at any other time specified in the order. 12.5 INCAPACITY. If the Employee Benefit Plan Board deems any Participant who is entitled to receive payments hereunder incapable of receiving or disbursing the same by reason of age, illness or infirmity or incapacity of any kind, the Employee Benefit Plan Board may direct the Trustee to apply such payment directly for the comfort, support and maintenance of such Participant or to pay the same to any responsible person caring for the Participant as determined by the Employee Benefit Plan Board to be qualified to receive and disburse such payments for the Participant's benefit, and the receipt of benefit such person shall be a complete acquittance for the payment of benefit. Payments pursuant to this Section 12.5 shall be complete XII-2 discharge to the extent thereof of any and all liability of PP&L, Resources, the Employee Benefit Plan Board, the Administrative Committee (if any), the Trustee, and the Fund. 12.6 GENDER AND NUMBER. Except where otherwise clearly indicated by context, the masculine shall include the feminine, the singular shall include the plural, and vice versa. 12.7 VOTING OR TENDERING SHARES. Each Participant (or, in the event of his or her death, his or her beneficiary) is, for purposes of this Section 12.7, hereby designated a "named fiduciary," within the meaning of section 403(a)(1) of ERISA with respect to his or her proportionate number of shares (such proportionate shares being determined at the respective times such fiduciary rights are exercisable, as set forth below). (a) VOTING RIGHTS. Each Participant (or beneficiary) shall have the right, to the extent of his or her proportionate number of shares (as determined in the last sentence of this Section 12.7(a)) to instruct the Trustee in writing as to the manner in which to vote such shares at any stockholders' meeting of PP&L. PP&L shall use its best efforts to timely distribute or cause to be distributed to each Participant (or beneficiary) the information distributed to stockholders of PP&L in connection with any such stockholders' meeting, together with a form requesting confidential instructions to the Trustee on how such shares shall be voted on each such matter. Upon timely receipt of such instructions, the Trustee shall, on each such matter, vote as directed the appropriate number of shares (including fractional shares). XII-3 The instructions received by the Trustee from individual Participants (or beneficiaries) shall be held by the Trustee in strict confidence and shall not be divulged to any person, including employees, officers and directors of PP&L or any affiliate; provided, however, that, to the extent necessary for the operation of the Plan, such instructions may be relayed by the Trustee to a recordkeeper, auditor or other person providing services to the Plan if such person (i) is not PP&L, an affiliate or any employee, officer or director thereof, and (ii) agrees not to divulge such directions to any other person, including employees, officers and directors of PP&L and its affiliates. An individual's proportionate number of shares held in the trust shall be equal to the product of multiplying the total number of shares by a fraction, the numerator of which shall be the respective number of shares which are held in such individual's account for which he or she provides instructions to the Trustee and the denominator of which shall be the number of such shares in all such accounts for which instructions are provided to the Trustee. (b) RIGHTS ON TENDER OR EXCHANGE OFFER. Each Participant (or beneficiary) shall have the right, to the extent of his or her proportionate number (as determined in the last sentence of this Section 12.7(b)) of shares to instruct the Trustee in writing as to the manner in which to respond to a tender or exchange offer with respect to such shares. PP&L shall use its best efforts to timely distribute or cause to be distributed to each such Participant (or beneficiary) the information distributed to stockholders of PP&L in connection with any such tender or exchange offer. Upon timely receipt of such instructions, the Trustee shall respond as XII-4 instructed with respect to such shares. If, and to the extent that, the Trustee shall not have received timely instructions from any individual given a right to instruct the Trustee with respect to certain shares by the first sentence of this Section 12.7(b), such individual shall be deemed to have timely instructed the Trustee not to tender or exchange such shares. The instructions received by the Trustee from individual Participants (or beneficiaries) shall be held by the Trustee in strict confidence and shall not be divulged or released to any person, including employees, officers and directors of PP&L or an Affiliated Company; provided, however, that, to the extent necessary for the operation of the Plan, such instructions may be relayed by the Trustee to a recordkeeper, auditor or other person providing services to the Plan if such person (i) is not PP&L, an Affiliated Company or any employee, officer or director thereof, and (ii) agrees not to divulge such instructions to any other person, including employees, officers and directors of PP&L and Affiliated Companies. An individual's proportionate number of shares shall be equal to the product of multiplying the total number of shares by a fraction, the numerator of which shall be the number of shares which are held in such individual's account and the denominator of which shall be the total number of shares. 12.8 USE OF LOAN PROCEEDS. Subject to 12.9, no Stock acquired with the proceeds of an exempt loan (within the meaning of section 4975(e)(7) of the Code) shall be subject to a put, call, or other option or buy-sell or similar arrangement while held by or when distributed from the Plan, whether or not the Plan is an employee stock ownership plan at such time. XII-5 12.9 PUT OPTION. In the event the Stock is ever not readily tradeable on an established market (whether or not the Plan is an employee stock ownership plan at such time), PP&L or Resources shall issue a "put option" to each Participant or beneficiary receiving a distribution of Stock from the Plan. Such put option shall permit the Participant or beneficiary to sell such Stock to PP&L or Resources, at any time during two option periods (described below), at the then fair-market value, as determined by an independent appraiser (as defined in section 401(a)(28) of the Code). The first put option period shall be a period of 60 days commencing on the date the Stock is distributed to the Participant or beneficiary. If the put option is not exercised within that period, it will temporarily lapse. Upon the close of the Plan Year in which such temporary lapse of the put option occurs, the Employee Benefit Plan Board shall establish the value of the Stock, as determined by an independent appraiser, and shall notify each distributee who did not exercise the initial put option prior to its temporary lapse in the preceding Plan Year of the revised value of the Stock. The second period during which the put option may be exercised shall commence on the date such notice of revaluation is given and shall permanently terminate 60 days thereafter. The Trustee may be permitted by PP&L to purchase Stock tendered to PP&L or Resources under a put option. The Participant may elect that the payment for Stock sold pursuant to a put option shall be made in one of the following forms: (a) in substantially equal annual installments commencing within 30 days from the date of the exercise of the put option and over a period not exceeding XII-6 five years, with interest payable at a reasonable rate on any unpaid installment balance, with adequate security provided, and without penalty for any prepayment of such installments; or (b) in a lump sum as soon as practicable after the exercise of the put option. The Trustee, on behalf of the Trust, may offer to purchase any shares of Stock (which are not sold pursuant to a put option) from any former Participant or beneficiary, at any time in the future, at their then fair-market value as determined by an independent appraiser. 12.10 COMPLIANCE WITH RULE 16B-3. With respect to Participants subject to section 16 of the Securities Exchange Act of 1934, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Board of Directors, the board of directors of Resources or Employee Benefit Plan Board involving such a Participant is deemed not to comply with an applicable condition of Rule 16b-3, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Board of Directors, the board of directors of Resources or Employee Benefit Plan Board. XII-7 ARTICLE XIII TREATMENT OF RETURNING VETERANS ------------------------------- 13.1 APPLICABILITY AND EFFECTIVE DATE. The rights of any Returning Veteran who resumes employment with PP&L on or after December 12, 1994 shall be modified as set forth in this Article. 13.2 ELIGIBILITY TO PARTICIPATE. For purposes of Section 3.1, (a) A Returning Veteran who was an Eligible Employee immediately prior to his Qualified Military Service shall be deemed to have remained an Eligible Employee throughout his Qualified Military Service. (b) A Returning Veteran who would have become an Eligible Employee during the period of his Qualified Military Service, but for the resulting absence from employment, shall be deemed to have become an Eligible Employee as of the date he would have become an Eligible Employee if he had not entered into Qualified Military Service. 13.3 RESTORATION OF TRASOP, PAYSOP, AND DIVIDEND-BASED CONTRIBUTIONS. With respect to any Plan Year for which a Returning Veteran would have been a Participant, but failed to share in TRASOP, PAYSOP, or Dividend-based Contributions under Sections 4.1, 4.3 and 4.4 solely by reason of his Qualified Military Service, PP&L shall contribute to such Participant's Account an amount equal to the TRASOP, PAYSOP, and Dividend-based Contributions that would have been allocated to his Account, but for his absence for Qualified Military Service. Such contribution shall not include the earnings that would have accrued on such amount. XIII-1 13.4 RESTORATION OF MATCHING CONTRIBUTIONS. (a) Each Returning Veteran who, during his period of Qualified Military Service, would have been eligible to make Matching Contributions shall be permitted to contribute an amount equal to the Matching Contributions that he could have made during such absence from employment. Such "make-up" contributions shall be made during the period that begins with his reemployment by PP&L and ends with (1) the expiration of a period of five years, or (2) if shorter, a period of three times the period of Qualified Military Service. (b) Any make-up contributions described in Subsection (a) hereof shall be in addition to those Matching Contributions that the Participant may elect to make pursuant to Section 4.2. 13.5 DETERMINATION OF COMPENSATION. For purposes of determining the amount of any make-up contributions under Section 13.3 or Section 13.4 and for applying the limits of Section 5.5, a Participant's compensation during any period of Qualified Military Service shall be deemed to equal either: (a) the compensation he would have received but for such Qualified Military Service, based on the rate of pay he would have received from PP&L; or (b) if the amount described in (a) above is not reasonably certain, his average compensation from PP&L during the 12-month period immediately preceding the Qualified Military Service (or, if shorter, the period of employment immediately preceding the Qualified Military Service). Such amount shall be adjusted as necessary to reflect the length of the Participant's Qualified Military Service. XIII-2 13.6 APPLICATION OF CERTAIN LIMITATIONS. (a) For purposes of applying the limitations of Section 5.5, any TRASOP, PAYSOP, or Dividend-based Contributions described in Section 13.3, and any make- up contributions described in Section 13.4, shall be treated as contributions for the Limitation Year to which they relate, rather than the Limitation Year in which they are actually made. (b) For purposes of applying the limitations of Section 4.6, any make-up contributions described in Section 13.4 shall be disregarded, both for the Plan Year to which the contributions relate, and for the Plan Year in which they are actually made. 13.7 ADMINISTRATIVE RULES AND PROCEDURES. The Employee Benefit Plan Board shall establish such rules and procedures as it deems necessary or desirable to implement the provisions of this Article, provided that they are not in violation of the Uniformed Services Employment and Reemployment Rights Act of 1994, any regulations thereunder, or any other applicable law. Executed this _____ day of ____________, 1998. PP&L, INC. By ___________ John M. Chappelear Vice President Investments & Pension XIII-3 EX-4.(A).2 3 AMENDMENT NO. 1 ESOP (1/1/98) Exhibit 4(a)-2 AMENDMENT NO. 1 TO PP&L EMPLOYEE STOCK OWNERSHIP PLAN WHEREAS, PP&L, Inc. ("PP&L") adopted the PP&L Employee Stock Ownership Plan (the "Plan"), effective January 1, 1975, for certain of its employees; and WHEREAS, PP&L amended and restated the Plan, effective January 1, 1998; and WHEREAS, PP&L desires to amend the plan; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective January 1, 1998, Article XII, Section 12.7 is amended to read: 12.7 VOTING OR TENDERING STOCK. Each Participant (or, in the event of his or her death, his or her beneficiary) is, for purposes of this Section 12.7, designated a 'named fiduciary," within the meaning of section 403(a)(1) of ERISA with respect to his or her proportionate number of shares of Stock (such proportionate number of shares being determined at the respective times such fiduciary rights are exercisable, as set forth below). (a) VOTING RIGHTS. Each Participant (or beneficiary) shall have the right, to the extent of his or her proportionate number of shares of Stock (as determined in the last sentence of this Section 12.7(a)) to instruct the Trustee in writing as to the manner in which to vote such Stock at any stockholders' meeting of Resources. PP&L shall use its best efforts to timely distribute or cause to be distributed to each Participant (or beneficiary) the information distributed to stockholders of Resources in connection with any such stockholders' meeting, together with a form requesting confidential instructions to the Trustee on how such shares of Stock shall be voted on each such matter. Upon timely receipt of such instructions, the Trustee shall, on each such matter, vote as directed the appropriate number of shares of shares of Stock (including fractional shares). An individual's proportionate number of shares of Stock held in the trust shall be equal to the product of multiplying the total number of shares of Stock by a fraction, the numerator of which shall be the respective number of shares of Stock which are held in such individual's account for -1- which he or she provides instructions to the Trustee and the denominator of which shall be the number of shares of Stock in all such accounts for which instructions are provided to the Trustee. (b) RIGHTS ON TENDER OR EXCHANGE OFFER. Each Participant (or beneficiary) shall have the right, to the extent of his or her proportionate number of shares of Stock (as determined in the last sentence of this Section 12.7(b)) of shares to instruct the Trustee in writing as to the manner in which to respond to a tender or exchange offer with respect to such Stock. PP&L shall use its best efforts to timely distribute or cause to be distributed to each such Participant (or beneficiary) the information distributed to stockholders of Resources in connection with any such tender or exchange offer. Upon timely receipt of such instructions, the Trustee shall respond as instructed with respect to such shares. If, and to the extent that, the Trustee shall not have received timely instructions from any individual given a right to instruct the Trustee with respect to certain shares of Stock by the first sentence of this Section 12.7(b), such individual shall be deemed to have timely instructed the Trustee not to tender or exchange such shares of Stock. An individual's proportionate number of shares of Stock shall be equal to the product of multiplying the total number of shares of Stock by a fraction, the numerator of which shall be the number of shares which are held in such individual's account and the denominator of which shall be the total number of shares of Stock. (c) CONFIDENTIALITY. All instructions received by the Trustee from individual participants (or beneficiaries) pursuant to this Section 12.7 shall be held by the Trustee in strict confidence and shall not be divulged or released to any person; provided, that, to the extent necessary for the operation of the Plan or compliance with applicable law, such instructions may be relayed by the Trustee to a recordkeeper, auditor or other person providing services to the Plan or responsible for monitoring compliance with applicable laws, if such person is either: (1) a person who is not the Company or an Affiliated Company or an employee, officer or director of the Company or an Affiliated Company and who agrees not to divulge such instructions to any other person, including the Company, an Affiliated Company, or employees, officers and directors of the Company or an Affiliated Company; or (2) a person who is an employee of the Company or an Affiliated Company, if such person is specifically authorized by the Employee Benefit Plan Board to receive such information pursuant to confidentiality procedures designed to safeguard the confidentiality of such information. The Employee Benefit -2- Plan Board shall be responsible for monitoring compliance with such procedures, for the adequacy of such procedures, and for appointing an independent fiduciary to carry out activities relating to any situation that, in the determination of the Employee Benefit Plan Board, involves a potential for undue employer influence on Participants (or beneficiaries) with regard to their exercise of rights under this Section 12.7. IN WITNESS WHEREOF, this Amendment No. 1 is executed this 6th day of August, 1998. PP&L INC. By: ------------------------- John M. Chappelear Vice President-Investments & Pensions -3- EX-4.(A).3 4 AMENDMENT NO. 2 ESOP (12/1/98) Exhibit 4(a)-3 AMENDMENT NO. 2 TO PP&L EMPLOYEE STOCK OWNERSHIP PLAN WHEREAS, PP&L, Inc. ("PP&L") adopted the PP&L Employee Stock Ownership Plan (the "Plan"), effective January 1, 1975, for certain of its employees; and WHEREAS, PP&L amended and restated the Plan, effective January 1, 1998; and subsequently amended by Amendment No. 1; and WHEREAS, PP&L desires to amend the plan; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective December 1, 1998, the following sections of Articles I, VII and VIII, are amended to read: 1.1 The purpose of this Plan is to provide Employees some ownership of stock of PP&L Resources, Inc., without requiring any reduction in pay or other employee benefits, or the surrender of any other rights on the part of Employees, and to invest primarily in the stock of PP&L Resources, Inc. 7.9 Withdrawals. (b)(1) Any Participant who has completed at least ten years of participation in the Plan and attained age 55 may elect within 90 days after the close of each Plan Year in the election period (as defined in Subsection (b)(2) below) to withdraw 25% of his Account attributable to Stock acquired by or contributed to the Plan on or after December 31, 1986 to the extent such portion of his Account exceeds the sum of (A) the amount to which a prior election under this Subsection applies and (B) any amount withdrawn under Subsection (a) pursuant to an election made -1- within 90 days after the close of any Plan Year in the election period. In the case of a Participant's final election, "50%" shall be substituted for "25%" in the preceding sentence to determine the amount the Participant may withdraw. The determination of the date on which Stock is acquired by or contributed to the Plan shall be made in accordance with section 401 (a) (28) of the Code and regulations thereunder. (2) The election period for purposes of this Subsection is the six Plan Year period that begins with the Plan Year in which occurs the later of (A) the Participant's attainment of age 55 or (B) the first Plan Year in which the Participant has completed ten years of participation, except that the election period shall not begin before December 31, 1986. 8.2 Duties and Powers of Employee Benefit Plan Board and Administrative Committee. (a) In addition to the duties and powers described elsewhere hereunder, the Employee Benefit Plan Board shall have all such powers as may be necessary to discharge its duties hereunder including but not limited to the following specific duties and powers: (1) to retain such consultants, accountants, agents, clerical assistants and attorneys as may be deemed necessary or desirable to render statements, reports and advice with respect to the Plan and to assist the Employee Benefit Plan Board in complying with all applicable rules and regulations affecting the Plan. Any consultants, accountants, or attorneys may be the same as those retained by PP&L; (2) to make such amendments as provided for in Article X; -2- (3) to enact uniform and nondiscriminatory rules and regulations to carry out the provisions of the Plan; (4) to compute the amount of any distribution payable to a Participant or other amounts payable under the Plan and authorize disbursement from the Fund; (5) to interpret the provisions of the Plan; (6) to determine whether any domestic relations order received by the Plan is a qualified domestic relations order as provided in section 414(p) of the Code; (7) to evaluate administrative procedures; (8) to delegate such duties and powers as the Employee Benefit Plan Board shall determine from time to time to any person or persons or to an administrative committee. To the extent of any such delegation, the delegate shall have the duties, powers, authority, and discretion of the Employee Benefit Plan Board; and (9) to establish a claims procedure under which claims will be reviewed by the Manager- Employee Benefits, or such other individual as may be designated by the Vice President-Human Resources and under which each claimant shall receive notice in writing in the event any claim for benefits with respect to a Participant's participation in the Plan has been denied; such notice shall set forth the specific reasons for such denial. Such claims procedure shall also provide an opportunity for full and fair review by the Administrative Committee of the Employee Benefit Plan Board; (b) In addition, to any other duties and powers it may possess, the Administrative Committee of the Employee Benefit Plan Board shall have the -3- following specific duties and powers: (1) to resolve questions or disputes relating to eligibility for distributions or the amount of distributions under the Plan; (2) to interpret the provisions of the Plan; The Employee Benefit Plan Board and the Administrative Committee of the Employee Benefit Plan Board shall have the discretionary authority and final right to interpret, construe and make benefit determinations (including eligibility and amount) under the Plan. The decisions of the Employee Benefit Plan Board and the Administrative Committee of the Employee Benefit Plan Board are final and conclusive for all purposes. II. Except as provided for in this Amendment No. 2, all other provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment No. 2 is executed this 12th day of November, 1998. PP&L, INC. By: /s/ John M. Chappelear ------------------------------- John M. Chappelear Chairman Employee Benefit Plan Board -4- EX-10.(A) 5 364-DAY REVOLVING CREDIT AGREEMENT Exhibit 10(a) - -------------------------------------------------------------------------------- $350,000,000 AMENDED AND RESTATED 364-DAY REVOLVING CREDIT AGREEMENT Among PP&L, INC. PP&L CAPITAL FUNDING, INC., as Borrowers PP&L RESOURCES, INC., as Guarantor of the obligations of PP&L Capital Funding, Inc. THE CHASE MANHATTAN BANK, as Administrative Agent CITIBANK, N.A. as Documentation Agent and THE BANKS NAMED HEREIN, Dated as of November 20, 1997 as amended and restated as of November 19, 1998 ___________________________ CHASE SECURITIES INC., Lead Arranger and Book Manager - -------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
Page ---- SECTION 1. Amounts and Terms of Loans......................................... 1 1.1 Commitments........................................................ 1 1.2 Notices of Borrowing............................................... 2 1.3 Disbursement of Funds.............................................. 2 1.4 Repayment of Loans; Evidence of Debt............................... 3 1.5 Special Payment Provisions......................................... 4 1.6 Fees............................................................... 5 1.7 Reductions in Total Commitments.................................... 5 1.8 Compensation....................................................... 6 SECTION 1A. Letters of Credit.................................................. 6 SECTION 2. Interest........................................................... 11 2.1 Rates of Interest.................................................. 11 2.2 Determination of Rate of Borrowing................................. 12 2.3 Interest Payment Dates............................................. 12 2.4 Conversions; Interest Periods...................................... 12 2.5 Increased Costs, Illegality, Etc................................... 14 2.6 Extension of Expiry Date........................................... 18 SECTION 3. Payments........................................................... 19 3.1 Payments on Non-Business Days...................................... 19 3.2 Voluntary Prepayments.............................................. 20 3.3 Method and Place of Payment, Etc................................... 20 3.4 Net Payments....................................................... 21 SECTION 4. Conditions Precedent............................................... 22 4.1 Conditions to Effectiveness........................................ 22 4.2A Conditions to Each Loan to PPL and Each Issuance of Letter of Credit on behalf of PPL.................................. 23 4.2B Conditions to Each Loan to Finance Co. and Each Issuance of a Letter of Credit on behalf of Finance Co...................... 24 SECTION 5.A Covenants of PPL................................................... 25 5.1A Financial Statements............................................... 25 5.2A Mergers............................................................ 26 5.3A Ratings............................................................ 26 5.4A Consolidated Indebtedness to Consolidated Capitalization........... 27 SECTION 5.B Covenants of Finance Co. and Resources............................. 27 5.1B Financial Statements............................................... 27 5.2B Mergers............................................................ 28 5.3B Ratings............................................................ 29 5.4B Liens.............................................................. 29 5.5B Consolidated Indebtedness to Consolidated Capitalization........... 29 SECTION 6.A Events of Default for PPL.......................................... 29
Page ---- 6.1A Representations, Etc................................................ 29 6.2A Principal and Interest.............................................. 29 6.3A Defaults by PPL Under Other Agreements.............................. 30 6.4A Judgments........................................................... 30 6.5A Bankruptcy, Etc..................................................... 30 6.6A Other Covenants..................................................... 31 SECTION 6.B Events of Default for Finance Co.................................... 31 6.1B Representations, Etc................................................ 31 6.2B Principal and Interest.............................................. 31 6.3B Defaults by PPL, Finance Co. or Resources Under This Agreement or Other Agreements....................................... 31 6.4B Judgments........................................................... 32 6.5B Bankruptcy, Etc..................................................... 32 6.6B Other Covenants..................................................... 33 6.7B Events of Default With Respect to PPL............................... 33 SECTION 7.A Representations and Warranties of PPL............................... 34 7.1A Corporate Status.................................................... 34 7.2A Authority; No Conflict.............................................. 34 7.3A Legality, Etc....................................................... 35 7.4A Financial Statements................................................ 35 7.5A Litigation.......................................................... 35 7.6A No Violation........................................................ 35 7.7A ERISA............................................................... 36 7.8A Consents............................................................ 36 7.9A Subsidiaries........................................................ 36 7.10A Investment Company Act.............................................. 36 7.11A Public Utility Holding Company Act.................................. 36 7.12A Tax Returns......................................................... 36 7.13A Compliance with Laws................................................ 36 7.14A Year 2000........................................................... 37 SECTION 7.B Representations and Warranties of Finance Co. and Resources........................................................... 37 7.1B Corporate Status.................................................... 37 7.2B Authority; No Conflict.............................................. 37 7.3B Legality, Etc....................................................... 37 7.4B Financial Statements................................................ 37 7.5B Litigation.......................................................... 38 7.6B No Violation........................................................ 38 7.7B ERISA............................................................... 38 7.8B Consents............................................................ 38 7.9B Investment Company Act.............................................. 39 7.10B Public Utility Holding Company Act.................................. 39 7.11B Tax Returns......................................................... 39 7.12B Compliance with Laws................................................ 39 7.13B Year 2000........................................................... 40 SECTION 8. Agent............................................................... 39 8.1 Appointment......................................................... 39
Page ---- 8.2 Nature of Duties.................................................... 40 8.3 Rights, Exculpation, Etc............................................ 40 8.4 Reliance............................................................ 41 8.5 Indemnification..................................................... 41 8.6 The Agent, Individually............................................. 42 8.7 Resignation by the Agent............................................ 42 SECTION 9. Resources' Guarantee................................................ 43 SECTION 10. Miscellaneous....................................................... 44 10.1 Definitions......................................................... 44 10.2 Accounting Principles............................................... 56 10.3 Exercise of Rights.................................................. 57 10.4 Amendment and Waiver................................................ 57 10.5 Expenses; Indemnification........................................... 58 10.6 Successors and Assigns.............................................. 59 10.7 Notices, Requests, Demands.......................................... 62 10.8 Survival of Representations and Warranties.......................... 62 10.9 Governing Law....................................................... 62 10.10 Counterparts........................................................ 63 10.11 Effectiveness....................................................... 63 10.12 Transfer of Office.................................................. 63 10.13 Proration of Payments............................................... 63 10.14 Jurisdiction; Consent to Service of Process......................... 64 10.15 WAIVER OF JURY TRIAL................................................ 65 10.16 Headings Descriptive................................................ 65 Bank Address Schedule SCHEDULE I - Commitments EXHIBIT A - Form of Opinion of senior counsel of PPL, Finance Co. and Resources EXHIBIT B - Form of Opinion of Thelen Reid & Priest LLP EXHIBIT C - Form of Extension Letter EXHIBIT D1- Form of PPL Compliance Certificate EXHIBIT D2- Form of Resources Compliance Certificate
364-DAY REVOLVING CREDIT AGREEMENT, dated as November 20, 1997, as amended and restated as of November 19, 1998, among PP&L, INC., a Pennsylvania corporation ("PPL"), and PP&L CAPITAL FUNDING, INC., a Delaware corporation ("Finance Co."), as Borrowers; PP&L RESOURCES, INC., a Pennsylvania corporation ("Resources"), as guarantor of the obligations of Finance Co. hereunder; the banks listed on Schedule I hereto (each a "Bank" and collectively the "Banks"); THE CHASE MANHATTAN BANK, as fronting bank (in such capacity, the "Fronting Bank") and as administrative agent for the Banks to the extent and in the manner provided in (S) 8 below (in such capacity, the "Agent"); and CITIBANK, N.A., as documentation agent (in such capacity, the "Documentation Agent") (all capitalized terms used herein shall have the meanings specified therefor in (S) 10.1 unless otherwise defined herein). W I T N E S S E T H : - - - - - - - - - - WHEREAS, subject to and upon the terms and conditions set forth herein, the Banks are willing to make available to PPL and Finance Co. the credit facility herein provided for working capital and other general corporate purposes of the Borrowers, including investments in, or loans to, affiliates of the Borrowers; NOW, THEREFORE, it is agreed: SECTION 1. Amounts and Terms of Loans. -------------------------- 1.1 Commitments. Subject to and upon the terms and conditions herein ----------- set forth, each Bank severally and not jointly agrees, at any time and from time to time prior to the Expiry Date, as such date may be extended pursuant to (S) 2.6, to make a loan or loans (each a "Loan" and collectively for all Banks, the "Loans") to PPL or Finance Co., as requested by such Borrower, which Loans (i) shall at the option of PPL or Finance Co., as applicable, be initially maintained as Base Rate Loans or Eurodollar Loans, provided that all the Loans made by all the Banks at any one Borrowing to a Borrower hereunder must be either all Base Rate Loans or all Eurodollar Loans, (ii) may be repaid and borrowed in accordance with the provisions hereof and (iii) shall not exceed in aggregate principal amount at any time outstanding the difference between such 2 Bank's Commitment and the L/C Exposure of such Bank at such time. 1.2 Notices of Borrowing. Whenever a Borrower desires to make a -------------------- Borrowing hereunder, it shall give the Agent at the Payment Office (i) no later than 12:00 Noon (New York time) at least three Business Days' prior written notice or telephonic notice (confirmed in writing) of each Eurodollar Loan to be made hereunder and (ii) no later than 11:30 A.M. (New York time) on the date of such Borrowing written notice or telephonic notice (confirmed in writing) of each Base Rate Loan to be made hereunder. Each such notice (each a "Notice of Borrowing") shall state that the Borrowing is being made hereunder and shall specify the aggregate principal amount the applicable Borrower desires to borrow hereunder, the date of Borrowing (which shall be a Business Day), the Type of Loans to be made pursuant to such Borrowing and the Interest Period to be applicable thereto. The Agent shall promptly give each Bank telephonic notice (confirmed in writing) of the proposed Borrowing, of such Bank's proportionate share thereof and of the other matters covered by the Notice of Borrowing. Each Borrowing shall be in an integral multiple of $500,000 and not less than $10,000,000 and shall be made from each Bank in the proportion which its respective Commitment bears to the Total Commitment except as otherwise specifically provided in (S) 2.5. The failure of any Bank to make any Loan required hereby shall not release any other Bank from its obligation to make Loans as provided herein. 1.3 Disbursement of Funds. (a) No later than 12:00 Noon (New York --------------------- time) (or, in the case of Base Rate Loans, 2:00 P.M. (New York time)) on the date specified in each Notice of Borrowing each Bank will make available the amount of its pro rata portion of the Loans requested to be made on such date in --- ---- U.S. dollars and in immediately available funds, to the Agent at the Payment Office. The Agent will make available to the applicable Borrower not later than 1:00 P.M. (New York time) (or, in the case of Base Rate Loans, 3:00 P.M. (New York time)) on such date at the Payment Office the aggregate of the amounts in immediately available funds made available by the Banks against delivery to the Agent at the Payment Office, or at such other office as the Agent may specify, of the documents and papers provided for herein. The Agent shall deliver the documents and papers received by it for the account of each Bank to such Bank or upon its order. (b) If the Fronting Bank shall not have received from a Borrower the payment required to be made by such Borrower pursuant to (S) 1A(e) within the time specified in such Section, the Fronting Bank will promptly notify the 3 Agent of the L/C Disbursement and the Agent will promptly notify each Bank of such L/C Disbursement and its Applicable Percentage thereof. Not later than 2:00 P.M. (New York time) on such date (or, if such Bank shall have received such notice later than 12:00 Noon (New York time) on any day, no later than 10:00 A.M. (New York time) on the immediately following Business Day), each Bank will make available the amount of its Applicable Percentage of such L/C Disbursement (it being understood that such amount shall be deemed to constitute a Base Rate Loan of such Bank and such payment shall be deemed to have reduced the L/C Exposure) in immediately available funds, to the Agent at the Payment Office, and the Agent will promptly pay to the Fronting Bank amounts so received by it from the Banks. The Agent will promptly pay to the Fronting Bank any amounts received by it from such Borrower pursuant to (S) 1A(e) prior to the time that any Bank makes any payment pursuant to this paragraph (b), and any such amounts received by the Agent thereafter will be promptly remitted by the Agent to the Banks that shall have made such payments and to the Fronting Bank, as their interests may appear. If any Bank shall not have made its Applicable Percentage of such L/C Disbursement available to the Agent as provided above, such Bank agrees to pay interest on such amount, for each day from and including the date such amount is required to be paid in accordance with this paragraph to but excluding the date such amount is paid, to the Agent for the account of the Fronting Bank at, for the first such day, the Federal Funds Rate, and for each day thereafter, the Base Rate. 1.4 Repayment of Loans; Evidence of Debt. (a) The outstanding ------------------------------------ principal balance of each Loan shall be payable by the Borrower to which such Loan was made on the Expiry Date, subject to the provisions of (S) 2.6. Each Loan shall bear interest from the date thereof on the outstanding principal balance thereof as set forth in (S) 2.1. Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness to such Bank resulting from each Loan made by such Bank from time to time to each Borrower, including the amounts of principal and interest payable and paid to such Bank from time to time under this Agreement. The Agent shall maintain the Register pursuant to (S)1.4(b), and a subaccount for each Bank and each Borrower, in which Register and subaccounts (taken together) shall be recorded (i) the amount of each Loan made hereunder, the Type of each Loan made and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the applicable Borrower to each Bank hereunder and (iii) the amount of any 4 sum received by the Agent hereunder from each Borrower and each Bank's share thereof. The entries made in the Register and accounts maintained pursuant to this (S)1.4 shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Bank or -------- ------- the Agent to maintain such account, such Register or such subaccount, as applicable, or any error therein shall not in any manner affect the obligations of each Borrower to repay the Loans in accordance with their terms. The obligations of the Borrowers with respect to their respective Loans shall be several, not joint. (b) The Agent shall maintain at the Payment Office a register for the recordation of the names and addresses of the Banks, the Commitments of the Banks from time to time, and the principal amount of the Loans owing to each Bank from each Borrower from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error. The Register shall be available for inspection by each Borrower, the Agent or any Bank at any reasonable time and from time to time upon reasonable prior notice. 1.5 Special Payment Provisions. Unless the Agent shall have been -------------------------- notified by any Bank prior to any date of a Borrowing that such Bank does not intend to make available to the Agent such Bank's portion of the Loans to be made on such date, the Agent may assume that such Bank has made such amount available to the Agent on such date of a Borrowing and the Agent may, in reliance upon such assumption, make available to the applicable Borrower a corresponding amount. If such amount is not in fact made available to the Agent by such Bank, the Agent shall be entitled to recover such amount on demand from such Bank. If such Bank does not pay such amount forthwith upon the Agent's demand therefor, the Agent shall promptly notify the applicable Borrower and the applicable Borrower shall pay such amount to the Agent. The Agent shall also be entitled to recover from such Bank or the applicable Borrower, as the case may be, interest on such amount in respect of each day from the date such amount was made available by the Agent to the applicable Borrower to the date such amount is recovered by the Agent, at a rate per annum equal to (i) in the case of such Bank, the Federal Funds Rate and (ii) in the case of either Borrower, the applicable rate provided in (S) 2.1 for the applicable Type of Loan. Nothing herein shall be deemed to relieve any Bank from its obligation to fulfill its Commitment hereunder or to prejudice any rights which the applicable 5 Borrower may have against any Bank as a result of the failure of such Bank to perform its obligations hereunder. 1.6 Fees. (a) The Borrowers agree to pay to the Agent for pro rata ---- --- ---- distribution to each Bank a Commitment Fee (the "Commitment Fee"), for the period from the Closing Date until the Expiry Date (or such earlier date as the Total Commitment shall be terminated as to both Borrowers), on the average daily unused amount of the Commitments, computed at the Applicable Commitment Fee Percentage per annum computed on the basis of the number of days actually elapsed over a year of 365 or 366 days and payable quarterly in arrears on the last day of each calendar quarter and on the Expiry Date (or such earlier date as the Total Commitment shall be terminated as to both Borrowers). (b) Each Borrower agrees to pay to the Agent for pro rata distribution --- ---- to each Bank a fee (an "L/C Participation Fee"), for the period from the Closing Date until the Expiry Date (or such earlier date as all Letters of Credit shall be canceled or expire and the Total Commitment shall be terminated as to both Borrowers), on that portion of the average daily L/C Exposure attributable to Letters of Credit issued for the account of such Borrower (excluding the portion thereof attributable to unreimbursed L/C Disbursements), at the rate per annum equal to the Applicable Eurodollar Margin from time to time in effect for such Borrower and payable quarterly in arrears on the last day of each calendar quarter and on the date on which the Total Commitment shall be terminated as provided herein. All L/C Participation Fees shall be computed on the basis of the number of days actually elapsed over a year of 365 or 366 days. 1.7 Reductions in Total Commitments. The Borrowers shall have the ------------------------------- right, upon at least 3 Business Days' prior written notice to the Agent at the Payment Office (which notice the Agent shall promptly transmit to each of the Banks), to reduce permanently the Total Commitment, in an aggregate amount equal to an integral multiple of $1,000,000 and not less than $10,000,000, or to terminate the unutilized portion of the Total Commitment, provided that (i) any -------- such reduction or termination shall apply proportionately to the Commitments of the Banks and (ii) no such termination or reduction shall be made that would reduce the Total Commitments to an amount less than the sum of the aggregate outstanding principal amount of Loans and the aggregate L/C Exposure. 1.8 Compensation. The applicable Borrower shall compensate each ------------ Bank, upon such Bank's written request 6 given promptly after learning of the same, for all losses, expenses and liabilities (including, without limitation, any interest paid by such Bank to lenders of funds borrowed by it to make or carry its Eurodollar Loans and any loss sustained by such Bank in connection with the re-employment of such funds), which the Bank sustains: (i) if for any reason (other than a failure of such Bank to perform its obligations) a Borrowing of any Eurodollar Loan does not occur on a date specified therefor in a Notice of Borrowing or notice of conversion (whether or not withdrawn or canceled pursuant to (S) 2.5 or otherwise), (ii) if any repayment or conversion (pursuant to (S) 2.5 or otherwise) of any of its Eurodollar Loans occurs on a date which is not the last day of the Interest Period applicable thereto, or (iii) without duplication of any amounts paid pursuant to (S) 2 hereof, as a consequence of any other default by such Borrower to repay its Eurodollar Loans when required by the terms of this Agreement. A certificate as to any amounts payable to any Bank under this (S) 1.8 submitted to the applicable Borrower by such Bank shall show the amount payable and the calculations used to determine such amount and shall, absent manifest error, be final, conclusive and binding upon all parties hereto. SECTION 1A. Letters of Credit. (a) General. A Borrower may from ------------------ -------- time to time request the issuance of Letters of Credit for its own account (for obligations of such Borrower or any of its Subsidiaries, or in the case of Finance Co., for any of Resources' Subsidiaries (other than PPL and its Subsidiaries)), denominated in dollars, in form reasonably acceptable to the Agent and the Fronting Bank, at any time and from time to time while the Commitments remain in effect. This Section shall not be construed to impose an obligation upon the Fronting Bank to issue any Letter of Credit that is inconsistent with the terms and conditions of this Agreement. (b) Notice of Issuance, Amendment, Renewal, Extension; Certain ---------------------------------------------------------- Conditions. In order to request the issuance of a Letter of Credit (or to - ----------- amend, renew or extend an existing Letter of Credit), the applicable Borrower shall hand deliver or telecopy to the Fronting Bank and the Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) below), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare such Letter of Credit. A Letter of 7 Credit shall be issued, amended, renewed or extended only if, and upon issuance, amendment, renewal or extension of each Letter of Credit the applicable Borrower shall be deemed to represent and warrant that, after giving effect to such issuance, amendment, renewal or extension (A) the L/C Exposure shall not exceed $5,000,000 and (B) the Aggregate Credit Exposure shall not exceed the Total Commitment. (c) Expiration Date. Each Letter of Credit shall expire at the close ---------------- of business on the date that is five Business Days prior to the Expiry Date, unless such Letter of Credit expires by its terms on an earlier date. (d) Participations. By the issuance of a Letter of Credit and --------------- without any further action on the part of the Fronting Bank or the Banks, the Fronting Bank hereby grants to each Bank, and each such Bank hereby acquires from the Fronting Bank, a participation in such Letter of Credit equal to such Bank's Applicable Percentage from time to time of the aggregate amount available to be drawn under such Letter of Credit, effective upon the issuance of such Letter of Credit. In consideration and in furtherance of the foregoing, each Bank hereby absolutely and unconditionally agrees to pay to the Agent, for the account of the Fronting Bank, such Bank's proportionate share of each L/C Disbursement made by the Fronting Bank and not reimbursed by the applicable Borrower forthwith on the date due as provided in (S) 1.3(b). Each Bank acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default or the termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (e) Reimbursement. If the Fronting Bank shall make any L/C -------------- Disbursement in respect of a Letter of Credit, the applicable Borrower shall pay to the Agent an amount equal to such L/C Disbursement not later than two hours after the applicable Borrower shall have received notice from the Fronting Bank that payment of such draft will be made, or, if the applicable Borrower shall have received such notice later than 10:00 A.M. (New York time) on any Business Day, not later than 10:00 A.M. (New York time) on the immediately following Business Day. 8 (f) Obligations Absolute. The applicable Borrower's obligations to --------------------- reimburse L/C Disbursements as provided in paragraph (e) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under any and all circumstances whatsoever, and irrespective of: (i) any lack of validity or enforceability of any Letter of Credit or any Loan Document, or any term or provision therein; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of any Letter of Credit or any Loan Document; (iii) the existence of any claim, setoff, defense or other right that the applicable Borrower, any other party guaranteeing, or otherwise obligated with, either Borrower or any subsidiary or other affiliate thereof or any other person may at any time have against the beneficiary under any Letter of Credit, the Fronting Bank, the Agent or any Bank or any other person, whether in connection with this Agreement, any other Loan Document or any other related or unrelated agreement or transaction; (iv) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment by the Fronting Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit; and (vi) any other act or omission to act or delay of any kind of the Fronting Bank, the Banks, the Agent or any other person or any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of the applicable Borrower's obligations hereunder. Without limiting the generality of the foregoing, it is expressly understood and agreed that the absolute and unconditional obligation of the Borrowers hereunder to reimburse L/C Disbursements will not be excused by the gross negligence or wilful misconduct of the Fronting Bank. However, the foregoing shall not be construed to excuse 9 the Fronting Bank from liability to the applicable Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the applicable Borrower to the extent permitted by applicable law) suffered by the applicable Borrower that are caused by the Fronting Bank's gross negligence or wilful misconduct in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof; it is understood that the Fronting Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary and, in making any payment under any Letter of Credit (i) the Fronting Bank's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary thereunder equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, be deemed not to constitute wilful misconduct or gross negligence of the Fronting Bank. (g) Disbursement Procedures. The Fronting Bank shall, promptly ------------------------ following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Fronting Bank shall as promptly as possible give telephonic notification, confirmed by telecopy, to the Agent and the applicable Borrower (and, if the applicable Borrower is Finance Co., Resources) of such demand for payment and whether the Fronting Bank has made or will make an L/C Disbursement thereunder; provided that any failure to -------- give or delay in giving such notice shall not relieve the applicable Borrower of its obligation to reimburse the Fronting Bank and the Banks with respect to any such L/C Disbursement. The Agent shall promptly give each Bank notice thereof. (h) Interim Interest. If the Fronting Bank shall make any L/C ----------------- Disbursement in respect of a Letter of Credit, then, unless the applicable Borrower shall reimburse such L/C Disbursement in full on the date thereof, the unpaid amount thereof shall bear interest for 10 the account of the Fronting Bank, for each day from and including the date of such L/C Disbursement, to but excluding the earlier of the date of payment by the applicable Borrower or the date on which interest shall commence to accrue on the Base Rate Loans resulting from such L/C Disbursement as provided in (S) 1.3(b), at the rate per annum that would apply to such amount if such amount were a Base Rate Loan. (i) Cash Collateralization. If any Event of Default with respect to ----------------------- a Borrower shall occur and be continuing, such Borrower shall, on the Business Day it receives notice from the Agent or the Required Banks thereof and of the amount to be deposited, deposit in an account with the Agent, for the benefit of the Banks, an amount in cash equal to the portion of the L/C Exposure attributable to Letters of Credit issued for the account of such Borrower and outstanding as of such date. Such deposit shall be held by the Agent as collateral for the payment and performance of the obligations under this Agreement. The Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Such deposits shall not bear interest. Moneys in such account shall automatically be applied by the Agent to reimburse the Fronting Bank for L/C Disbursements attributable to Letters of Credit issued for the account of the Borrower depositing such moneys for which the Fronting Bank has not been reimbursed, and any remaining amounts will either (i) be held for the satisfaction of the reimbursement obligations of such Borrower for the L/C Exposure at such time or (ii) if the maturity of the Loans of such Borrower has been accelerated, be applied to satisfy the obligations of such Borrower under this Agreement. If a Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to such Borrower within three Business Days after all Events of Default have been cured or waived. SECTION 20 Interest. -------- 2.1 Rates of Interest. (a) Each Borrower agrees to pay interest in ----------------- respect of the unpaid principal amount of each Base Rate Loan made to it from the date the proceeds thereof are made available to it until prepayment pursuant to (S) 3 or maturity (whether by acceleration or otherwise) at a rate per annum which shall be the Base Rate in effect from time to time. 11 (b) Each Borrower agrees to pay interest in respect of the unpaid principal amount of each Eurodollar Loan made to it from the date the proceeds thereof are made available to it until prepayment pursuant to (S) 3 or maturity (whether by acceleration or otherwise) at a rate per annum which shall be the relevant Quoted Rate plus the Applicable Eurodollar Margin. (c) Each Borrower agrees to pay interest in respect of overdue principal of, and (to the extent permitted by law) overdue interest in respect of, each Loan made to it, on demand, at a rate per annum which shall be 2% in excess of the Base Rate in effect from time to time. (d) Interest shall be computed on the actual number of days elapsed on the basis of a 360-day year; provided, however, that for any rate of interest -------- ------- determined by reference to the Prime Rate, interest shall be computed on the actual number of days elapsed on the basis of a year of 365 or 366 days. (e) In computing interest on the Loans, the date of the making of a Loan shall be included and the date of payment shall be excluded, provided, -------- however, that if a Loan is repaid on the same day on which it is made, such day - ------- shall nevertheless be included in computing interest thereon. 2.2 Determination of Rate of Borrowing. As soon as practicable after ---------------------------------- 10:00 A.M. (New York time) on the second Business Day prior to the commencement of any Interest Period with respect to a Eurodollar Loan, the Agent shall determine (which determination, absent manifest error, shall be final, conclusive and binding upon all parties) the rate of interest which shall be applicable to such Eurodollar Loan for the Interest Period applicable thereto and shall promptly give notice thereof (in writing or by telephone, confirmed in writing) to the applicable Borrower and the Banks. In the event that there is no applicable rate for such Eurodollar Loan: (i) the Agent shall promptly give notice thereof (in writing or by telephone, confirmed in writing) to the applicable Borrower and the Banks and (ii) such Loan shall be deemed to have been requested to be made as a Base Rate Loan and (iii) the rate applicable to such Loan shall be the Base Rate in effect from time to time. 2.3 Interest Payment Dates. Accrued interest shall be payable (i) in ---------------------- respect of each Eurodollar Loan, at the end of the Interest Period relating thereto and in respect of each Loan with an Interest Period of longer than 12 3 months, on each 3-month anniversary of the first day of such Interest Period, (ii) in respect of each Base Rate Loan, at the end of each Interest Period relating thereto and (iii) in respect of each Loan, on any prepayment (on the amount prepaid), at maturity (whether by acceleration or otherwise) and, after maturity, on demand. 2.4 Conversions; Interest Periods. (a) Each Borrower shall have the ----------------------------- option to convert on any Business Day, all or a portion at least equal to $10,000,000 of the outstanding principal amount of the Loans made to it pursuant to one or more Borrowings of one Type of Loans into a Borrowing or Borrowings of another Type of Loan, provided that (i) except as provided in (S)2.5(b), -------- Eurodollar Loans may be converted into Base Rate Loans only on the last day of an Interest Period applicable thereto and no partial conversion of a Borrowing of Eurodollar Loans shall reduce the outstanding principal amount of the Loans pursuant to such Borrowing to less than $10,000,000 and (ii) Loans may only be converted into Eurodollar Loans if no Default or Event of Default with respect to such Borrower is in existence on the date of the conversion. Each such conversion shall be effected by such Borrower by giving the Agent at its Payment Office, prior to 12:00 Noon (New York time), at least three Business Days (or by 12:00 Noon on the same Business Day in the case of a conversion into Base Rate Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each a "Notice of Conversion") specifying the Loans to be so converted, the Borrowing or Borrowings pursuant to which such Loans were made, the Type of Loans to be converted into and, if to be converted into a Borrowing of Eurodollar Loans, the Interest Period to be initially applicable thereto. The Agent shall give each Bank prompt notice of any such proposed conversion affecting any of its Loans. 13 (b) At the time a Borrower gives a Notice of Borrowing or Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 12:00 Noon (New York time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans (in the case of any subsequent Interest Period), such Borrower shall have the right to elect, by giving the Agent written notice (or telephonic notice promptly confirmed in writing), the Interest Period applicable to such Borrowing, which Interest Period shall, at the option of such Borrower, be a one, two, three or six month period or, subject to availability on the part of each Bank, such shorter period as ends on the Expiry Date. Notwithstanding anything to the contrary contained above: (i) the initial Interest Period for any Borrowing of Eurodollar Loans shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing of Base Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; (ii) if any Interest Period applicable to a Borrowing of Eurodollar Loans begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iii) no Interest Period in respect of any Borrowing of Loans shall extend beyond the Expiry Date; and (iv) all Eurodollar Loans comprising a Borrowing shall at all times have the same Interest Period. If upon the expiration of any Interest Period, a Borrower has failed to elect a new Interest Period to be applicable to the respective Borrowing of Eurodollar Loans as provided above or is unable to elect a new Interest Period as a result of (S) 2.4(a)(ii) above, such Borrower shall be deemed to have elected to convert such Borrowing into a Borrowing of Base Rate Loans effective as of the expiration date of such current Interest Period. 2.5 Increased Costs, Illegality, Etc. (a) In the event that any --------------------------------- Bank (including the Agent and the Fronting Bank) shall have reasonably determined (which 14 determination shall be final and conclusive and binding upon all parties but, with respect to the following clauses (i), (ii) and (iii), shall be made only after consultation with the applicable Borrower and the Agent on the date of such determination) that: (i) on any date for determining the Quoted Rate for any Interest Period, by reason of any change after the date hereof affecting the interbank Eurodollar market or affecting the position of such Bank (if a Reference Bank), in such market, adequate and fair means do not exist for ascertaining the applicable interest rate by reference to the Quoted Rate; or (ii) at any time, by reason of (y) any change after the date hereof in any applicable law or governmental rule, regulation or order (or any interpretation thereof by a governmental authority or otherwise (provided -------- that, in the case of an interpretation not by a governmental authority, such interpretation shall be made in good faith and shall have a reasonable basis) and including the introduction of any new law or governmental rule, regulation or order), to the extent not provided for in clause (iii) below, or (z) in the case of Eurodollar Loans, other circumstances affecting such Bank or the interbank Eurodollar market or the position of such Bank in such market, the Quoted Rate shall not represent the effective pricing to such Bank for funding or maintaining the affected Eurodollar Loan; or (iii) at any time, by reason of the requirements of Regulation D or other official reserve requirements, the Quoted Rate shall not represent the effective pricing to such Bank for funding or maintaining the affected Eurodollar Loan; or (iv) at any time, that the making or continuance of any Eurodollar Loan or the issuance of any Letter of Credit has become unlawful by compliance by such Bank or by the Fronting Bank in good faith with any law, governmental rule, regulation, guideline or order, or would cause severe hardship to such Bank or to the Fronting Bank as a result of a contingency occurring after the date hereof which materially and adversely affects the interbank Eurodollar market; then, and in any such event, the Bank so affected shall on such date of determination give notice (by telephone confirmed in writing) to each applicable Borrower and to the 15 Agent (who shall give similar notice to each Bank) of such determination. Thereafter, (x) in the case of clause (i), (ii) or (iii) above, each applicable Borrower shall pay to such Bank, upon written demand therefor, such additional amounts deemed in good faith by such Bank to be material (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Bank in its discretion shall determine) as shall be required to cause such Bank to receive interest with respect to its affected Eurodollar Loan at a rate per annum equal to the then Applicable Eurodollar Margin in excess of the effective pricing to such Bank to make or maintain such Eurodollar Loan and (y) in the case of clause (iv), each applicable Borrower shall take one of the actions specified in (S) 2.5(b) as promptly as possible and, in any event, within the time period required by law. A certificate as to additional amounts owed any such Bank, showing in reasonable detail the basis for the calculation thereof, submitted to each applicable Borrower and the Agent by such Bank shall, absent manifest error, be final, conclusive and binding upon all of the parties hereto. (b) At any time that any of its Loans are affected by the circumstances described in (S) 2.5(a) each applicable Borrower may (i) if the affected Eurodollar Loan is then being made pursuant to a Borrowing, cancel said Borrowing by giving the Agent notice thereof by telephone (confirmed in writing) on the same date that such Borrower was notified by the affected Bank pursuant to (S) 2.5(a) or (ii) if the affected Eurodollar Loan is then outstanding, upon at least 3 Business Days' written notice to the Bank, require the Bank to convert such Eurodollar Loan into a Base Rate Loan; provided that if more than one Bank is affected at any time, then all affected Banks must be treated in the same manner pursuant to this (S) 2.5(b). (c) In the event that a Borrower shall be paying additional amounts to a Bank pursuant to (S) 2.5(a)(i), (ii) or (iii) or (S) 2.5(d) (and, in the case of (S) 2.5(d), such Bank has not eliminated the increased costs by designating a new Applicable Lending Office) or is unable to incur a Eurodollar Loan from such Bank because of the existence of a condition described in (S) 2.5(a)(iv) (any such Bank, an "Affected Bank") covering a period of 90 consecutive days, the Borrowers, the Agent and the Affected Bank shall consult with a view towards (but being under no obligation to) amending this Agreement, with the consent of the Banks other than the Affected Bank (the "Unaffected Banks") which, at such time, have outstanding two-thirds of the aggregate principal amount of 16 the Loans outstanding hereunder (exclusive of the aggregate principal amount of the Loans outstanding of the Affected Bank), to provide for (i) the termination of the Affected Bank's Commitment, provided that such termination is accompanied -------- by payment in full of the outstanding amount of all Loans of the Affected Bank, interest accrued on such amount to the date of payment and all other liabilities and obligations of the Borrowers hereunder (including, without limitation, amounts payable pursuant to (S) 1.8, (S) 2.5(a) or (S) 2.5(d)) with respect to the Affected Bank, and (ii) the substitution of another bank for the Affected Bank and/or the increase, pro rata or otherwise, of the Commitments of the --- ---- Unaffected Banks or otherwise, so that the Total Commitment remains the amount which would be applicable in the absence of the occurrence of clause (i) of this (S) 2.5(c); provided that no Commitment of any Unaffected Bank may be changed without the consent of such Bank. (d) If any Bank reasonably determines at any time that any applicable law or governmental rule, regulation, order or request (whether or not having the force of law) concerning capital adequacy, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency, will have the effect of increasing the amount of capital required or expected to be maintained by such Bank based on the existence of such Bank's Commitment hereunder or its obligations hereunder or under any Letter of Credit, then promptly upon receipt of a written demand from such Bank meeting the requirements of this (S) 2.5(d), the applicable Borrowers agree to pay such Bank such additional amounts as shall be required to compensate such Bank for the increased cost to such Bank of making Loans to (or issuing Letters of Credit for the account of) the Borrowers, as a result of such increase in capital for the first Compensation Period (as defined below). After the initial written demand for payment in respect of this (S) 2.5(d) is delivered to the applicable Borrowers by such Bank, written demand for payment may be submitted for each Compensation Period thereafter that this Agreement remains in effect as to such Bank. Each such written demand shall (i) specify (a) the event pursuant to which such Bank is entitled to claim the additional amount, (b) the date on which the event occurred and became applicable to the Bank and (c) the Compensation Period for which the amount is due and (ii) set out in reasonable detail the basis and computation of such additional amount. Each period for which the additional amounts may be claimed by such Bank (a "Compensation Period") shall be the lesser of (x) the number of days actually elapsed since the date the event occurred and became applicable to such Bank or (y) 90 days. Payments made by the applicable Borrowers to any Bank in respect of 17 this (S) 2.5(d) shall be made on the last day of the Compensation Period specified in each written demand with a final payment to be made on the date of termination of this Agreement as to such Bank. Provided that each Bank acts reasonably and in good faith and uses averaging and attribution methods which are reasonable in determining any additional amounts due under this (S) 2.5(d), such Bank's determination of compensation owing under this (S) 2.5(d) shall, absent manifest error, be final and conclusive and binding on all the parties hereto. No Bank shall be entitled to compensation under this (S) 2.5(d) for any costs incurred with respect to any date unless it shall have notified the applicable Borrowers that it will demand compensation for such costs not more than 60 days after the later of (i) such date and (ii) the date on which it shall have become aware of such costs. (e) Each Bank agrees that, upon the occurrence of any event giving rise to the operation of (S) 2.5(d) with respect to such Bank, such Bank shall, if requested by the Borrowers, designate another Applicable Lending Office for any Loans affected by such event with the objective of eliminating, avoiding or mitigating the consequence of the event giving rise to the operation of such section; provided that such Bank and its Applicable Lending Office shall not, in the sole judgment of such Bank, suffer any economic, legal or regulatory disadvantage. Nothing in this (S) 2.5(e) shall affect or postpone any of the obligations of a Borrower or the right of any Bank provided in (S) 2.5(d). 2.6 Extension of Expiry Date. (i) The Borrowers may, by sending an ------------------------ Extension Letter to the Agent (in which case the Agent shall promptly deliver a copy to each of the Banks), not less than 30 days and not more than 45 days prior to the Expiry Date then in effect (the "Current Expiry Date"), request that the Banks extend the Expiry Date so that it will occur 364 days after the Current Expiry Date. Each Bank, acting in its sole discretion, shall, by notice to the Agent given not less than 20 days and not more than 30 days prior to the Current Expiry Date, advise the Agent in writing whether or not such Bank agrees to such extension (each Bank that so advises the Agent that it will not extend the Expiry Date being referred to herein as a "Non-extending Bank"); provided -------- that any Bank that does not advise the Agent by the 20th day prior to the Current Expiry Date shall be deemed to be a Non-extending Bank. The election of any Bank to agree to such extension shall not obligate any other Bank to agree. 18 (ii) (A) If Banks holding Commitments that aggregate at least 51% of the Total Commitment on that 20th day prior to the Current Expiry Date shall not have agreed to extend the Expiry Date, then the Current Expiry Date shall not be so extended and the outstanding principal balance of all loans and other amounts payable hereunder shall be payable on the Current Expiry Date. (B) If (and only if) Banks holding Commitments that aggregate at least 51% of the Total Commitment on the 20th day prior to the Current Expiry Date shall have agreed to extend the Expiry Date, then the Expiry Date applicable to the Banks that are not Non-extending Banks shall be the day that is 364 days after the Current Expiry Date. In the event of such extension, the Commitment of each Non- extending Bank shall terminate on the Current Expiry Date, all Loans and other amounts payable hereunder to such Non-extending Banks shall become due and payable on the Current Expiry Date and the Total Commitment of the Banks hereunder shall be reduced by the Commitments of Non-extending Banks so terminated on and after such Current Expiry Date. (iii) In the event that the conditions of clause (B) of paragraph (ii) above have been satisfied, the Borrowers shall have the right on or before the Current Expiry Date, at their own expense, to require any Non-extending Bank to transfer and assign without recourse (except as to title and the absence of Liens created by it) (in accordance with and subject to the restrictions contained in (S) 10.6) all its interests, rights and obligations under this Agreement (including with respect to any L/C Exposure) to one or more other banks or other financial institutions (which may include any Bank) (each, an "Additional Commitment Bank"), provided that (x) such Additional Commitment Bank, if not already a Bank hereunder, shall be subject to the approval of the Agent (not to be unreasonably withheld), (y) such assignment shall become effective as of the Current Expiry Date and (z) the Additional Commitment Bank, shall pay to such Non-extending Bank in immediately available funds on the effective date of such assignment the principal of and interest accrued to the date of payment on the Loans made by such Non-extending Bank hereunder and all other amounts accrued for such Non-extending Bank's account or owed to it hereunder. Notwithstanding the foregoing, no extension of the Expiry Date shall become effective unless, on the Current Expiry Date the conditions set forth in paragraphs (a), (b) and (d) of (S)(S) 4.2A and 4.2B shall be satisfied (with all references in such paragraphs to the making of a Loan or issuance of a Letter of Credit being deemed to be references to the extension of the Commitments on the Current Expiry Date) and the Agent shall have received a 19 certificate to that effect dated the Current Expiry Date and executed by a responsible officer of each of the Borrowers and Resources. SECTION 3. Payments. -------- 3.1 Payments on Non-Business Days. Whenever any payment to be made ----------------------------- hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, if a payment of principal has been so extended, interest shall be payable on such principal at the applicable rate during such extension. 3.2 Voluntary Prepayments. Each Borrower shall have the right to --------------------- prepay its Loans in whole or in part, without premium or penalty, from time to time pursuant to this (S) 3.2 on the following terms and conditions: (i) the applicable Borrower shall give the Agent at the Payment Office at least 3 Business Days' prior written notice or telephonic notice (confirmed in writing) of its intent to prepay such Loans, which notice shall specify the amount of such prepayment and the specific Borrowing to be prepaid, which notice the Agent shall promptly transmit to each of the Banks; (ii) each prepayment shall be in an integral multiple of $1,000,000 and not less than $10,000,000 (or, if less, the amount then remaining outstanding in respect of the Borrowing being prepaid); (iii) each prepayment in respect of Loans made pursuant to one Borrowing shall be applied pro rata among the Banks on the basis of such Loans, --- ---- except as otherwise provided in (S) 2.5; (iv) at the time of any prepayment, the applicable Borrower shall pay all interest accrued on the principal amount of said prepayment and, if the applicable Borrower prepays any Eurodollar Loan on any day other than the last day of an Interest Period applicable thereto, the applicable Borrower shall compensate the Banks for losses sustained as a result of such prepayment to the extent and as provided in (S) 1.8. 3.3 Method and Place of Payment, Etc. Except as expressly provided --------------------------------- herein, all payments under this Agreement shall be made to the Agent for the ratable account of the Banks not later than Noon (New York time) on the date when due and shall be made in freely transferable U.S. dollars and in immediately available funds at the Payment Office (or, if such payment is made in respect of principal of or interest on any Eurodollar Loan, for the account of such non-U.S. office of the Agent as the Agent may from time to time direct). Unless the Agent shall have been notified by the applicable Borrower prior to the date on which any payment to be made by the applicable Borrower 20 hereunder is due that the applicable Borrower does not intend to remit such payment, the Agent may, at its discretion, assume that the applicable Borrower has remitted such payment when so due and the Agent may, at its discretion and in reliance upon such assumption, make available to each Bank (for the account of its applicable lending office) on such payment date an amount equal to such Bank's share of such assumed payment. If the applicable Borrower has not in fact remitted such payment to the Agent, each Bank shall forthwith on demand repay to the Agent the amount of such assumed payment made available to such Bank together with interest thereon in respect of each day from and including the date such amount was made available by the Agent to such Bank to the date such amount is repaid to the Agent at a rate per annum equal to the Federal Funds Rate. On the commencement date of each Interest Period and on each date occurring two Business Days prior to an Interest Payment Date, the Agent shall notify the applicable Borrower of the amount of interest and/or fees due at the end of such Interest Period or on such Interest Payment Date (assuming, in the case of Base Rate Loans, that there is no change in the rate of interest applicable to the applicable Base Rate Loan); provided, however, that failure to so notify the applicable Borrower shall not affect such Borrower's obligation to make any such payments. 3.4 Net Payments. All payments under this Agreement shall be made ------------ without set-off or counterclaim and in such amounts as may be necessary in order that all such payments of principal and interest in connection with Loans (after deduction or withholding for or on account of (i) any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government or any political subdivision or taxing authority thereof, other than any tax (except such taxes referred to in clause (ii) below) on or measured by the net income of a Bank pursuant to the income tax laws of the jurisdiction where such Bank's principal or lending office is located or in which such Bank maintains a place of business (collectively the "Taxes") and (ii) deduction of an amount equal to any taxes on or measured by the net income payable by any such Bank with respect to the amount by which the payments required to be made by this (S) 3.4 exceed the amount otherwise specified to be paid under this Agreement) shall not be less than the amounts otherwise specified to be paid under this Agreement. A certificate as to any additional amounts payable to any Bank under this (S) 3.4 submitted to the applicable Borrower by such Bank shall show in reasonable detail the amount payable and the calculations used to determine such amount and shall, 21 absent manifest error, be final, conclusive and binding upon all parties hereto. With respect to each deduction or withholding for or on account of any Taxes, the applicable Borrower shall promptly furnish to each Bank such certificates, receipts and other documents as may be required (in the judgment of such Bank) to establish any tax credit to which such Bank may be entitled. SECTION 4. Conditions Precedent. -------------------- 4.1 Conditions to Effectiveness. On the Closing Date: --------------------------- (a) The Agent shall have received from the general counsel or senior counsel of PPL a favorable opinion dated the Closing Date substantially in the form of Exhibit A hereto. (b) The Agent shall have received an opinion of Reid & Priest LLP, counsel for PPL, Finance Co. and Resources, addressed to the Agent, the Fronting Bank and the Banks, dated the Closing Date, with respect to the enforceability of this Agreement against PPL and Finance Co., and with respect to the enforceability of the guarantee hereunder by Resources of the obligations of Finance Co. against Resources, substantially in the form of Exhibit B hereto. (c) All corporate and legal proceedings and all instruments in connection with the transactions contemplated by this Agreement (including resolutions of the Board of Directors of PPL, Finance Co. and Resources and certificates as to the incumbency of the officers signing this Agreement or any certificate delivered in connection herewith) shall be satisfactory in form and substance to the Agent, and the Agent shall have received all information and copies of all documents that it has requested, such documents where appropriate to be certified by proper corporate or governmental authorities. (d) The Agent shall have received from each of the Banks, the Fronting Bank, PPL, Finance Co. and Resources a duly executed and delivered counterpart hereof. (e) The conditions set forth in (SS) 4.2A and 4.2B (other than (S) 4.2A(c) and (S)4.2B(c)) shall have been satisfied. 22 (f) The Agent shall have received a certificate signed by appropriate officers of PPL stating that all regulatory approvals necessary to permit PPL to enter into this Agreement and to perform its obligations hereunder have been obtained and are in full force and effect and attaching evidence of all such regulatory approvals. 4.2A Conditions to Each Loan to PPL and Each Issuance of a Letter of --------------------------------------------------------------- Credit for the account of PPL. The obligation of each Bank to make each Loan to - ----------------------------- PPL (excluding any conversions of one Type of Loan to another Type pursuant to (S) 2.5(b)) and of the Fronting Bank to issue each Letter of Credit for the account of PPL hereunder is subject, at the time of the making of each such Loan and the issuance of each such Letter of Credit (except as hereinafter indicated), to the satisfaction of the following conditions, with the making of each such Loan and the issuance of each such Letter of Credit constituting a representation and warranty by PPL that the conditions specified in (S)(S) 4.2A(a), (b), (d) and (e) below are then satisfied: (a) No Default. At the time of the making each such Loan to PPL, and ---------- the issuance of each Letter of Credit for the account of PPL and after giving effect thereto, there shall exist no Default or Event of Default with respect to PPL. (b) Representations and Warranties. At the time of the making of ------------------------------ each such Loan to PPL and the issuance of each such Letter of Credit for the account of PPL and after giving effect thereto, all representations and warranties contained in (S) 7A hereof shall be true and correct with the same force and effect as though such representations and warranties had been made as of such time. (c) Notice of Borrowing. The Agent shall have received Notice of ------------------- Borrowing from PPL as required by (S) 1.2 or, in the case of the issuance of a Letter of Credit, the Fronting Bank and the Agent shall have received a notice from PPL requesting the issuance of such Letter of Credit as required by (S) 1A(b). (d) No Adverse Change. Since December 31, 1997, there shall have ----------------- been no change in the business, assets, financial condition or operations of PPL and its Subsidiaries taken as a whole which materially and 23 adversely affects the ability of PPL to perform any of its obligations hereunder. (e) Regulatory Approval. The making of such Loan to PPL or the ------------------- issuance of such Letter of Credit for the account of PPL shall not cause the aggregate dollar amount of Loans and Letters of Credit outstanding for the account of PPL to exceed the amount of such obligations for which PPL has obtained the necessary regulatory approval. 4.2B Conditions to Each Loan to Finance Co. and Each Issuance of ----------------------------------------------------------- a Letter of Credit for the account of Finance Co. The obligation of each ------------------------------------------------- Bank to make each Loan to Finance Co. (excluding any conversions of one Type of Loan to another Type pursuant to (S) 2.5(b)) and of the Fronting Bank to issue each Letter of Credit for the account of Finance Co. hereunder is subject, at the time of the making of each such Loan and the issuance of each such Letter of Credit (except as hereinafter indicated), to the satisfaction of the following conditions, with the making of each such Loan and the issuance of each such Letter of Credit constituting a representation and warranty by Finance Co. that the conditions specified in (SS) 4.2B(a), (b) and (d) below are then satisfied: (a) No Default. At the time of the making of each such Loan to ---------- Finance Co. and the issuance of each Letter of Credit for the account of Finance Co. and after giving effect thereto, there shall exist no Default or Event of Default with respect to Finance Co. (b) Representations and Warranties. At the time of the making of ------------------------------ each such Loan to Finance Co. and the issuance of each such Letter of Credit for the account of Finance Co. and after giving effect thereto, all representations and warranties contained in (S) 7B hereof shall be true and correct with the same force and effect as though such representations and warranties had been made as of such time. (c) Notice of Borrowing. The Agent shall have received Notice of ------------------- Borrowing from Finance Co. as required by (S) 1.2 or, in the case of the issuance of a Letter of Credit, the Fronting Bank and the Agent shall have received a notice from Finance Co. requesting the issuance of such Letter of Credit as required by (S) 1A(b). 24 (d) No Adverse Change. Since December 31, 1997, there shall have ----------------- been no change in the business, assets, financial condition or operations of Resources and its Subsidiaries taken as a whole which materially and adversely affects the ability of Resources to perform any of its obligations hereunder. SECTION 5.A Covenants of PPL. ---------------- While this Agreement is in effect and until the Total Commitment has been terminated with respect to PPL, all obligations of PPL hereunder shall have been paid in full and all Letters of Credit issued for the account of PPL shall have been canceled or have expired and all amounts drawn thereunder shall have been reimbursed in full, PPL agrees that: 5.1A Financial Statements. PPL will furnish to each Bank: -------------------- (a) within 120 days after the end of each fiscal year an auditors' report, including a balance sheet as at the close of such fiscal year and statements of income, shareowners' common equity and cash flows for such year for PPL and its consolidated Subsidiaries prepared in conformity with GAAP, with an opinion expressed by Price Waterhouse LLP or other independent auditors of recognized standing selected by it; (b) within 60 days after the end of each of the first three quarters in each fiscal year, a balance sheet as at the close of such quarterly period and statements of income, shareowners' common equity and cash flows for such quarterly period for itself and its consolidated Subsidiaries prepared in conformity with GAAP; (c) within 120 days after the end of each fiscal year, a copy of its Form 10-K Report to the Securities and Exchange Commission ("SEC") and within 60 days after the end of each of the first three quarters in each fiscal year, a copy of its Form 10-Q Report to the SEC; (d) from time to time, with reasonable promptness, such further information regarding its business, affairs and financial condition as any Bank and the Fronting Bank may reasonably request; and 25 (e) upon acquiring knowledge of the existence of a Default or Event of Default with respect to it a certificate of a financial officer specifying: (i) the nature of such Default or Event of Default, (ii) the period of the existence thereof, and (iii) the actions that PPL proposes to take with respect thereto. The financial statements required to be furnished pursuant to clauses (a) and (b) above shall be accompanied by a certificate of a principal financial officer of PPL to the effect that no Default or Event of Default with respect to it has occurred and is continuing. The financial statements required to be furnished pursuant to clause (a) above shall also be accompanied by a Compliance Certificate in the form of Exhibit D-1 hereto ("PPL Compliance Certificate") demonstrating compliance with (S) 5.4A. 5.2A Mergers. PPL will not merge or consolidate with any Person if ------- PPL is not the survivor unless (a) the survivor assumes the obligations of PPL hereunder, (b) the survivor is a utility whose business is not substantially different in character or composition from that of PPL and (c) the senior secured debt ratings of the survivor by Moody's and S&P as available (or if the ratings of Moody's and S&P are not available, of such other rating agency as shall be acceptable to the Agent), are at least equal to the ratings of PPL's First Mortgage Bonds (or other senior secured debt) immediately prior to such merger or consolidation. 5.3A Ratings. PPL will use its best efforts to promptly notify the ------- Banks upon obtaining knowledge of any change in, or cessation of, ratings of PPL's First Mortgage Bonds (or other senior secured debt) by Moody's or S&P. 5.4A Consolidated Indebtedness to Consolidated Capitalization. The -------------------------------------------------------- ratio of Consolidated Indebtedness of PPL to Consolidated Capitalization of PPL shall not exceed 70% at any time. SECTION 5.B Covenants of Finance Co. and Resources. -------------------------------------- 26 While this Agreement is in effect and until the Total Commitment has been terminated with respect to Finance Co., all obligations of Finance Co. and Resources hereunder shall have been paid in full and all Letters of Credit issued for the account of Finance Co. shall have been canceled or have expired and all amounts drawn thereunder shall have been reimbursed in full, each of Finance Co. and Resources agrees that: 5.1B Financial Statements. Resources will furnish to each Bank: -------------------- (a) within 120 days after the end of each fiscal year (i) an auditors' report, including a balance sheet as at the close of such fiscal year and statements of income, shareowners' common equity and cash flows for such year for Resources and its consolidated Subsidiaries prepared in conformity with GAAP, with an opinion expressed by Price Waterhouse LLP or other independent auditors of recognized standing selected by it and (ii) Resources' unconsolidated balance sheet as at the close of such fiscal year and statements of income, shareholders common equity and cash flows for such year; (b) within 60 days after the end of each of the first three quarters in each fiscal year, a balance sheet as at the close of such quarterly period and statements of income, shareowners' common equity and cash flows for such quarterly period for (i) Resources and its consolidated Subsidiaries prepared in conformity with GAAP, and (ii) Resources' unconsolidated balance sheet as at the close of such quarterly period and statements of income, shareowners' common equity and cash flow for such quarterly period; (c) within 120 days after the end of each fiscal year, a copy of Resources' Form 10-K Report to the Securities and Exchange Commission ("SEC") and within 60 days after the end of each of the first three quarters in each fiscal year, a copy of Resources' Form 10-Q Report to the SEC; (d) from time to time, with reasonable promptness, such further information regarding Resources' business, affairs and financial condition as any Bank and the Fronting Bank may reasonably request; and 27 (e) upon acquiring knowledge of the existence of a Default or Event of Default with respect to Finance Co. a certificate of a financial officer of Resources and an officer of Finance Co. specifying: (i) the nature of such Default or Event of Default, (ii) the period of the existence thereof, and (iii) the actions that Resources and Finance Co. propose to take with respect thereto. The financial statements required to be furnished pursuant to clauses (a) and (b) above shall be accompanied by a certificate of a principal financial officer of Resources to the effect that no Default or Event of Default with respect to Finance Co. has occurred and is continuing. The financial statements required to be furnished pursuant to clause (a) above shall also be accompanied by a Compliance Certificate in the form of Exhibit D-2 hereto ("Resources Compliance Certificate") demonstrating compliance with (S) 5.5B. 5.2B Mergers. (i) (1) Resources will not merge or consolidate with ------- any Person if Resources is not the survivor unless (a) the survivor assumes Resources' obligations hereunder, (b) substantially all of the consolidated assets and consolidated revenues of the survivor are anticipated to come from a utility business or utility businesses and (c) the senior unsecured debt ratings of the survivor by Moody's or S&P, as available (or if the ratings of Moody's and S&P are not available, of such other rating agency as shall be acceptable to the Required Banks), are at least equal to the ratings of Resource's senior unsecured debt immediately prior to such merger or consolidation; (2) Resources will not dispose of any common stock of either Borrower or any securities convertible into common stock of either Borrower, except in connection with any merger or consolidation permitted under this (S) 5.2B or under (S) 5.2A, and except that Resources shall be allowed to sell, transfer or otherwise dispose of PPL's common stock to PPL. (ii) Finance Co. will not merge into or consolidate with any other Person except (a) Resources or a successor of Resources permitted by this Section or (b) any other Person which is a wholly owned subsidiary of Resources or a successor of Resources permitted by this Section. 5.3B Ratings. Finance Co. and Resources will each use their best ------- efforts to promptly notify the Banks upon obtaining knowledge of any change in, or cessation of, 28 ratings of Resources' senior unsecured debt by Moody's or S&P. 5.4B Liens. Resources will not create, incur, or suffer to exist ----- any Lien in or on the common stock of PPL or Finance Co. or on securities convertible into the common stock of PPL or Finance Co. (in either case, now or hereafter acquired) other than Permitted Liens. 5.5B Consolidated Indebtedness to Consolidated Capitalization. The -------------------------------------------------------- ratio of Consolidated Indebtedness of Resources to Consolidated Capitalization of Resources shall not exceed 70% at any time. SECTION 6.A Events of Default with Respect to PPL. ------------------------------------- Each of the following events shall constitute an "Event of Default" with respect to PPL: 6.1A Representations, Etc. Any certificate furnished by PPL to the --------------------- Banks and the Fronting Bank pursuant hereto shall prove to have been incorrect in any material respect or any of the representations and warranties made by PPL herein or in connection herewith shall prove to have been incorrect in any material respect when made; or 6.2A Principal and Interest. PPL shall fail to make any payment of ---------------------- principal on any of its Loans or any other payment payable by PPL hereunder (including the reimbursement of any L/C Disbursement) when due or, in the case of interest or fees, within 10 days of the due date thereof; or 6.3A Defaults by PPL Under Other Agreements. PPL shall (i) fail to -------------------------------------- pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $50,000,000 beyond any period of grace provided with respect thereto, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness in a principal amount in excess of $50,000,000 beyond any period of grace provided with respect thereto if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf to cause, such Indebtedness to become due prior to its stated maturity; or 29 6.4A Judgments. PPL shall fail within 60 days to pay, bond or --------- otherwise discharge any judgment or order for the payment of money in excess of $25,000,000 that is not stayed on appeal or otherwise being appropriately contested in good faith; or 6.5A Bankruptcy, Etc. PPL shall commence a voluntary case ---------------- concerning itself under Title 11 of the United States Code entitled "Bankruptcy" as now or hereafter in effect or any successor thereto (the "Bankruptcy Code"); or an involuntary case shall be commenced against PPL or such case shall be controverted but shall not be dismissed within 60 days after the commencement of the case; or PPL shall not generally be paying its debts as they become due; or a custodian (as defined in the Bankruptcy Code) shall be appointed for, or shall take charge of, all or substantially all of the property of PPL or PPL shall commence any other proceeding under any reorganization, arrangement, readjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to PPL or there shall be commenced against PPL any such proceeding which remains undismissed for a period of 60 days or PPL shall be adjudicated insolvent or bankrupt; or PPL shall fail to controvert in a timely manner any such case under the Bankruptcy Code or any such proceeding, or any order of relief or other order approving any such case or proceeding shall be entered; or PPL by any act or failure to act shall indicate its consent to, approval of or acquiescence in any such case or proceeding or in the appointment of any custodian or the like for it or any substantial part of its property or shall suffer any such appointment to continue undischarged or unstayed for a period of 60 days; or PPL shall make a general assignment for the benefit of creditors; or any corporate action shall be taken by PPL for the purpose of effecting any of the foregoing; or 6.6A Other Covenants. PPL shall fail to perform or observe any --------------- other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for a period of 30 days after written notice thereof shall have been received by PPL from the Agent or the Required Banks. SECTION 6.B Events of Default with Respect to Finance Co. -------------------------------------------- Each of the following events shall constitute an "Event of Default" with respect to Finance Co.: 30 6.1B Representations, Etc. Any certificate furnished by Finance Co. --------------------- or Resources to the Banks and the Fronting Bank pursuant hereto shall prove to have been incorrect in any material respect or any of the representations and warranties made by Finance Co. or Resources herein or in connection herewith shall prove to have been incorrect in any material respect when made; or 6.2B Principal and Interest. Either Finance Co. or Resources shall ---------------------- fail to make any payment of principal on any Loan to Finance Co. or any other payment payable by Finance Co. or Resources hereunder (including the reimbursement of any L/C Disbursement) when due or, in the case of interest or fees, within 10 days of the due date thereof; or 6.3B Defaults by Finance Co. or Resources Under Other Agreements. ----------------------------------------------------------- Finance Co. or Resources shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $40,000,000, in the case of Indebtedness of Resources or Indebtedness of Finance Co. guaranteed by Resources or, in the case of Indebtedness of Finance Co. not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument (including any term, covenant, condition or agreement herein) evidencing or governing any such Indebtedness in a principal amount in excess of, in the case of Indebtedness of Resources or Indebtedness of Finance Co. guaranteed by Resources, $40,000,000 or, in the case of Indebtedness of Finance Co. not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf to cause, such Indebtedness to become due prior to its stated maturity; or 6.4B Judgments. Finance Co. or Resources shall fail within 60 days --------- to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $25,000,000 that is not stayed on appeal or otherwise being appropriately contested in good faith; or 6.5B Bankruptcy, Etc. Finance Co. or Resources shall commence a ---------------- voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy" as 31 now or hereafter in effect or any successor thereto (the "Bankruptcy Code"); or an involuntary case shall be commenced against Finance Co. or Resources or such case shall be controverted but shall not be dismissed within 60 days after the commencement of the case; or Finance Co. or Resources shall not generally be paying its debts as they become due; or a custodian (as defined in the Bankruptcy Code) shall be appointed for, or shall take charge of, all or substantially all of the property of Finance Co. or Resources or Finance Co. or Resources shall commence any other proceeding under any reorganization, arrangement, readjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Finance Co. or Resources or there shall be commenced against Finance Co. or Resources any such proceeding which remains undismissed for a period of 60 days or Finance Co. or Resources shall be adjudicated insolvent or bankrupt; or Finance Co. or Resources shall fail to controvert in a timely manner any such case under the Bankruptcy Code or any such proceeding, or any order of relief or other order approving any such case or proceeding shall be entered; or Finance Co. or Resources by any act or failure to act shall indicate its consent to, approval of or acquiescence in any such case or proceeding or in the appointment of any custodian or the like for it or any substantial part of its property or shall suffer any such appointment to continue undischarged or unstayed for a period of 60 days; Finance Co. or Resources shall make a general assignment for the benefit of creditors; or any corporate action shall be taken by Finance Co. or Resources for the purpose of effecting any of the foregoing; or 6.6B Other Covenants. Finance Co. or Resources shall fail to --------------- perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for a period of 30 days after written notice thereof shall have been received by Finance Co. or Resources, as the case may be, from the Agent or the Required Banks; or 6.7B Events of Default with Respect to PPL. An Event of Default ------------------------------------- shall occur with respect to PPL. If any Event of Default with respect to PPL as specified in Section 6A shall then be continuing, then either or both of the following actions may be taken: (i) the Agent, at the direction of the Required Banks, shall by written notice to PPL, declare the principal of and accrued interest in respect of all of PPL's outstanding Loans to be, whereupon the same and all other amounts due from PPL hereunder shall 32 become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by PPL, anything contained herein to the contrary notwithstanding, and (ii) the Agent, at the direction of the Required Banks, shall by written notice to PPL, declare the Total Commitment as to PPL terminated, whereupon the Commitment of each Bank (insofar as it is available to PPL) and the obligation of each Bank to make its Loans hereunder to PPL and the obligation of the Fronting Back to issue Letters of Credit for the account of PPL hereunder shall terminate immediately and any accrued Commitment Fee owed by PPL shall forthwith become due and payable without any other notice of any kind; provided that if an Event of Default described in (S) 6.5A shall occur with respect to PPL, the results which would otherwise occur only upon the giving of written notice by the Agent to PPL as specified in clauses (i) and (ii) above shall occur automatically without the giving of any such notice and without any instruction by the Required Banks to give such notice. If any Event of Default with respect to Finance Co. as specified in Section 6B shall then be continuing, then either or both of the following actions may be taken: (i) the Agent, at the direction of the Required Banks, shall by written notice to Resources and Finance Co., declare the principal of and accrued interest in respect of all of Finance Co.'s outstanding Loans to be, whereupon the same and all other amounts due from Resources or Finance Co. hereunder shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by Resources and Finance Co., anything contained herein to the contrary notwithstanding, and (ii) the Agent, at the direction of the Required Banks, shall, by written notice to Resources and Finance Co., declare the Total Commitment as to Finance Co. terminated (insofar as it is available to Finance Co.), whereupon the Commitment of each Bank and the obligation of each Bank to make its Loans to Finance Co. hereunder and the obligations of the Fronting Bank to issue Letters of Credit for the account of Finance Co. shall terminate immediately and any accrued Commitment Fee owed by Finance Co. shall forthwith become due and payable without any other notice of any kind; provided that if an Event of Default described in (S) 6.5B shall occur with respect to Finance Co., the results which would otherwise occur only upon the giving of written notice by the Agent to Finance Co. as specified in clauses (i) and (ii) above shall occur automatically without the giving of any such notice and without any instruction by the Required Banks to give such notice. 33 SECTION 7.A Representations and Warranties of PPL. ------------------------------------- In order to induce the Banks and the Fronting Bank to enter into this Agreement and to make the Loans to PPL and issue the Letters of Credit for the account of PPL, in each case, as provided for herein, PPL makes the following representations and warranties to the Banks and the Fronting Bank: 7.1A Corporate Status. It is duly incorporated, validly existing and ---------------- in good standing under the laws of the Commonwealth of Pennsylvania, and has the corporate power to make and perform this Agreement and to borrow hereunder. 7.2A Authority; No Conflict. The making and performance by it of ---------------------- this Agreement have been duly authorized by all necessary corporate action and do not and will not violate any provision of law or regulation, or any decree, order, writ or judgment, or any provision of its charter or by-laws, or result in the breach of or constitute a default under any indenture or other agreement or instrument to which it is a party. 7.3A Legality, Etc. This Agreement constitutes the legal, valid and -------------- binding obligation of PPL, enforceable in accordance with its terms except to the extent limited by bankruptcy, insolvency or reorganization laws or by other laws relating to or affecting the enforceability of creditors' rights generally and by general equitable principles which may limit the right to obtain equitable remedies. 7.4A Financial Statements. The consolidated financial statements of -------------------- PPL and its consolidated Subsidiaries for the year ended as at December 31, 1997, furnished to the Banks, fairly present its consolidated financial position at December 31, 1997 and the results of its consolidated operations for the year then ended and were prepared in accordance with GAAP. Since that date there has been no adverse change in the business, assets, financial condition or operations of PPL that would materially and adversely affect the ability of PPL to perform any of its obligations hereunder. 7.5A Litigation. Except as disclosed in or contemplated by PPL's ---------- Form 10-K Report to the SEC for the year ended December 31, 1997 or in any subsequent Form 10-Q Report or otherwise furnished in writing to the Banks, no litigation, arbitration or administrative proceeding is 34 pending or, to its knowledge, threatened, which, if determined adversely to PPL, would materially and adversely affect its ability to perform any of its obligations under this Agreement. There is no litigation, arbitration or administrative proceeding pending or, to the knowledge of PPL, threatened which questions the validity of this Agreement. 7.6A No Violation. No part of the proceeds of the borrowings by PPL ------------ under this Agreement or of any Letter of Credit issued for its account will be used, directly or indirectly by PPL for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or for any other purpose which violates, or which conflicts with, the provisions of Regulations G, U or X of said Board of Governors. PPL is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any such "margin stock." 7.7A ERISA. There have not been any "reportable events," as that ----- term is defined in Section 4043 of the Employee Retirement Income Security Act of 1974, as amended, which would result in a material liability to PPL. 7.8A Consents. No authorization, consent or approval from -------- governmental bodies or regulatory authorities is required for the making and performance by PPL of this Agreement, except such authorizations, consents and approvals as have been obtained prior to the making of any Loans or the issuance of any Letters of Credit and are in full force and effect at the time of the making of each Loan and the issuance of each Letter of Credit. 7.9A Subsidiaries. The assets of all Subsidiaries of PPL do not ------------ comprise in the aggregate more than 20% of the total consolidated assets of PPL. 7.10A Investment Company Act. PPL is not an "investment company" ---------------------- that is required to be registered under the Investment Company Act of 1940, as amended, in order not to be subject to the prohibitions of Section 7 of such Act. 7.11A Public Utility Holding Company Act. PPL is a "holding company" ---------------------------------- within the meaning of the Public Utility Holding Company Act of 1935, as amended, but is exempt from such Act (except for the provisions of Section 9(a)(2) thereof) by virtue of an order of the SEC pursuant to Section 3(a)(2) thereof. 35 7.12A Tax Returns. PPL has filed or caused to be filed all Federal, ----------- state, local and foreign tax returns or materials required to have been filed by it and has paid or caused to be paid all taxes due and payable by it and all assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which PPL shall have set aside on its books appropriate reserves with respect thereto in accordance with GAAP. 7.13A Compliance with Laws. PPL is in compliance with all laws, -------------------- regulations and orders of any governmental authority except to the extent (A) such compliance is being contested in good faith by appropriate proceedings or (B) non-compliance would not reasonably be expected to materially and adversely affect its ability to perform any of its obligations hereunder. 7.14A Year 2000. PPL has planned and commenced reprogramming to ---------- permit the proper performance of date-sensitive functions in and following the year 2000 by (i) PPL's computer systems and (ii) equipment containing embedded microchips (including systems and equipment under PPL's control that are supplied by others), and testing of all such systems and equipment, such that PP&L expects that its computer and management information systems will be sufficient to permit PPL to conduct its business without material adverse effect on its ability to perform its obligations hereunder. The cost to PPL of such reprogramming and testing is not expected to have a material adverse effect on its ability to perform its obligations hereunder. SECTION 7.B Representations and Warranties of Finance Co. and ------------------------------------------------- Resources. - --------- In order to induce the Banks and the Fronting Bank to enter into this Agreement and to make the Loans to Finance Co. and issue the Letters of Credit for the account of Finance Co., in each case as provided for herein, each of Finance Co. and Resources makes the following representations and warranties to the Banks and the Fronting Bank: 7.1B Corporate Status. Resources is duly incorporated, validly ---------------- existing and in good standing under the laws of the Commonwealth of Pennsylvania, and has the corporate power to make and perform this Agreement, and Finance Co. is duly incorporated, validly existing and in 36 good standing under the laws of the State of Delaware, and has the corporate power to make and perform this Agreement and to borrow hereunder. 7.2B Authority; No Conflict. The making and performance by Resources ---------------------- and Finance Co. of this Agreement have been duly authorized by all necessary corporate action and do not and will not violate any provision of law or regulation, or any decree, order, writ or judgment, or any provision of its charter or by-laws, or result in the breach of or constitute a default under any indenture or other agreement or instrument to which Resources or Finance Co., as the case may be, is a party. 7.3B Legality, Etc. This Agreement constitutes the legal, valid and -------------- binding obligation of each of Resources and Finance Co., enforceable against Resources or Finance Co., as the case may be, in accordance with its terms except to the extent limited by bankruptcy, insolvency or reorganization laws or by other laws relating to or affecting the enforceability of creditors' rights generally and by general equitable principles which may limit the right to obtain equitable remedies. 7.4B Financial Statements. The consolidated financial statements of -------------------- Resources for the year ended as at December 31, 1997, furnished to the Banks, fairly present Resources' consolidated financial position at December 31, 1997 and the results of its consolidated operations for the year then ended and were prepared in accordance with GAAP. Since that date there has been no adverse change in the business, assets, financial condition or operations of Resources that would materially and adversely affect its ability to perform any of its obligations hereunder. 7.5B Litigation. Except as disclosed in or contemplated by ---------- Resources's Form 10-K Report to the SEC for the year ended December 31, 1997, or in any subsequent Form 10-Q Report or otherwise furnished in writing to the Banks, no litigation, arbitration or administrative proceeding against Resources or Finance Co. is pending or, to Resources' knowledge, threatened, which, if determined adversely, would materially and adversely affect the ability of Resources to perform any of its obligations under this Agreement. There is no litigation, arbitration or administrative proceeding pending or, to the knowledge of Resources, threatened which questions the validity of this Agreement. 7.6B No Violation. No part of the proceeds of the borrowings by ------------ Finance Co. under this Agreement or of 37 any Letter of Credit issued for its account will be used, directly or indirectly by Finance Co. or any Subsidiary of Resources for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or for any other purpose which violates, or which conflicts with, the provisions of Regulations U or X of said Board of Governors. Neither Resources nor Finance Co. is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any such "margin stock." 7.7B ERISA. There have not been any "reportable events," as that ----- term is defined in Section 4043 of the Employee Retirement Income Security Act of 1974, as amended, which would result in a material liability to Resources. 7.8B Consents. No authorization, consent or approval from -------- governmental bodies or regulatory authorities is required for the making and performance by Resource or Finance Co. of this Agreement, except such authorizations, consents and approvals as have been obtained prior to the making of any Loans or the issuance of any Letters of Credit and are in full force and effect at the time of the making of each Loan and the issuance of each Letter of Credit. 7.9B Investment Company Act. Neither Resources nor Finance Co. is an ---------------------- "investment company" that is required to be registered under the Investment Company Act of 1940, as amended, in order not to be subject to the prohibitions of Section 7 of such Act. 7.10B Public Utility Holding Company Act. Resources is a "holding ---------------------------------- company" within the meaning of the Public Utility Holding Company Act of 1935, as amended, but is exempt from such Act (except for the provisions of Section 9(a)(2) thereof) by virtue of an order of the SEC pursuant to Section 3(a)(1) thereof. Finance Co. is not a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.11B Tax Returns. Resources and Finance Co. have filed or caused to ----------- be filed all Federal, state, local and foreign tax returns or materials required to have been filed by it and has paid or caused to be paid all taxes due and payable by it and all assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which Resources shall have 38 set aside on its books appropriate reserves with respect thereto in accordance with GAAP. 7.12B Compliance with Laws. Each of Resources and Finance Co. is in -------------------- compliance with all laws, regulations and orders of any governmental authority except to the extent (A) such compliance is being contested in good faith by appropriate proceedings or (B) non-compliance would not reasonably be expected to materially and adversely affect its ability to perform any of its obligations hereunder. 7.13B Year 2000. Resources has planned and commenced reprogramming ---------- to permit the proper performance of date-sensitive functions in and following the year 2000 by (i) Resources' computer systems and (ii) equipment containing embedded microchips (including systems and equipment under Resources' control that are supplied by others), and testing of all such systems and equipment, such that Resources expects that its computer and management information systems will be sufficient to permit Resources to conduct its business without material adverse effect on its ability to perform its obligations hereunder. The cost to Resources of such reprogramming and testing is not expected to have a material adverse effect on its ability to perform its obligations hereunder. SECTION 8. Agent. ----- 8.1 Appointment. The Banks hereby appoint The Chase Manhattan Bank ----------- as Agent (such term to include Agent acting as Agent) to act as herein specified. Each Bank and the Fronting Bank hereby irrevocably authorizes, and each assignee of any Bank or the Fronting Bank shall be deemed irrevocably to authorize, the Agent to take such action on their behalf under the provisions of this Agreement and any instruments, documents and agreements referred to herein (such instruments, documents and agreements being herein referred to as the "Loan Documents") and to exercise such powers hereunder and thereunder as are specifically delegated to the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder, or under the Loan Documents, by or through its agents or employees. 8.2 Nature of Duties. The duties of the Agent shall be mechanical ---------------- and administrative in nature. The Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Bank or of the Fronting Bank. Nothing in this Agreement or any of the 39 Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any of the Loan Documents except as expressly set forth herein. Each Bank and the Fronting Bank shall make its own independent investigation of the financial condition and affairs of PPL, Finance Co. and Resources and each of their Subsidiaries in connection with the making and the continuance of the Loans and the issuance of Letters of Credit hereunder and shall make its own appraisal of the creditworthiness of PPL, Resources and Finance Co.; and the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Bank or the Fronting Bank with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or the issuance of Letters of Credit or at any time or times thereafter. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible to any Bank or the Fronting Bank for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care except to the extent otherwise required by (S) 8.3. 8.3 Rights, Exculpation, Etc. Neither the Agent nor any of its ------------------------- officers, directors, employees, agents, attorneys-in-fact or affiliates shall be liable to any Bank or to the Fronting Bank for any action taken or omitted by it hereunder or under any of the Loan Documents, or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The Agent shall not be responsible to any Bank or to the Fronting Bank for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, or sufficiency of this Agreement or any of the Loan Documents or the financial condition of PPL, Finance Co. or Resources. The Agent shall not be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the Loan Documents or the financial condition of PPL, Finance Co. or Resources, or the existence or possible existence of any Default or Event of Default. The Agent may at any time request instructions from the Banks with respect to any actions or approvals which by the terms of this Agreement or any of the Loan Documents the Agent is permitted or required to take or to grant, and if such instructions are requested, the Agent shall be absolutely entitled to refrain from taking any 40 action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under this Agreement or any of the Loan Documents until it shall have received such instructions from the Required Banks or all Banks, as required. Without limiting the foregoing, no Bank shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder or under any of the Loan Documents in accordance with the instructions of the Required Banks or all Banks, as required. 8.4 Reliance. The Agent shall be entitled to rely upon any written -------- notice, statement, certificate, order or other document or any telephone message believed by it to be genuine and correct and to have been signed, sent or made by the proper Person, and, with respect to all legal matters pertaining to this Agreement or any of the Loan Documents and its duties hereunder or thereunder, upon advice of counsel selected by it. 8.5 Indemnification. To the extent that the Agent is not reimbursed --------------- and indemnified by PPL, Resources or Finance Co., the Banks will reimburse and indemnify the Agent for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent, acting pursuant hereto, in any way relating to or arising out of this Agreement or any of the Loan Documents or any action taken or omitted by the Agent under this Agreement or any of the Loan Documents, in proportion to their respective Commitments hereunder; provided, however, that -------- ------- no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or wilful misconduct. The obligations of the Banks under this (S) 8.5 shall survive the payment in full of outstanding Loans, the expiration of any Letter of Credit and the termination of this Agreement. 8.6 The Agent, Individually. With respect to its Commitment ----------------------- hereunder and the Loans made by it, the Agent shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Bank. The terms "Banks," "Required Banks" or any similar terms shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity as a Bank or one of the Required Banks. The Agent may accept 41 deposits from, lend money to, and generally engage in any kind of banking, trust or other business with PPL, Finance Co. or Resources as if it were not acting pursuant hereto. 8.7 Resignation by the Agent. The Agent may resign from the ------------------------ performance of all its functions and duties hereunder at any time by giving 30 Business Days' prior written notice to each Borrower, Resources and the Banks. Such resignation shall take effect upon the expiration of such 30 Business Day period or upon the earlier appointment of a successor. Upon any such resignation, the Required Banks shall appoint a successor Agent who shall be satisfactory to the Borrowers and Resources and shall be an incorporated bank or trust company. In the event no such successor shall have been so appointed, then any notification, demand or other communication required or permitted to be given by the Agent on behalf of the Banks to the Borrowers hereunder shall be sufficiently given if given by the Required Banks, and any notification, demand, other communication, document, statement, other paper or payment required to be made, given or furnished by PPL, Finance Co. or Resources to the Agent for distribution to the Banks shall be sufficiently made, given or furnished if made, given or furnished by PPL, Finance Co. or Resources, as applicable, directly to each Bank entitled thereto and, in the case of payments, in the amount to which each such Bank is entitled from the applicable Borrower. All powers specifically delegated to the Agent by the terms hereof may be exercised by the Required Banks. SECTION 9. Resources Guarantee. ------------------- In order to induce the Banks to extend credit hereunder to Finance Co., Resources hereby irrevocably and unconditionally guarantees, as primary obligor and not merely as a surety, the Finance Co. Obligations. Resources further agrees that the due and punctual payment of the Finance Co. Obligations may be extended or renewed, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its Guarantee hereunder notwithstanding any such extension or renewal of any Finance Co. Obligation. Resources waives presentment to, demand of payment from and protest to Finance Co. of any of the Finance Co. Obligations, and also waives notice of acceptance of its obligations and notice of protest for nonpayment. The obligations of Resources hereunder shall not be affected by (a) the failure of any Bank or the Agent to assert any claim or demand or to enforce any right or 42 remedy against Finance Co. under the provisions of this Agreement or otherwise, (b) change or increase in the amount of any of the Finance Co. Obligations, whether or not consented to by Resources, or (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or any other agreement. Resources further agrees that its agreement hereunder constitutes a promise of payment when due (whether or not any bankruptcy or similar proceeding shall have stayed the accrual or collection of any of the Finance Co. Obligations or operated as a discharge thereof) and not merely of collection, and waives any right to require that any resort be had by any Bank to any balance of any deposit account or credit on the books of any Bank in favor of any other person. The obligations of Resources hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever, by reason of the invalidity, illegality or unenforceability of the Finance Co. Obligations, any impossibility in the performance of the Finance Co. Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of Resources hereunder shall not be discharged or impaired or otherwise affected by the failure of the Agent or any Bank to assert any claim or demand or to enforce any remedy under this Agreement or any other agreement, by any waiver or modification in respect of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Finance Co. Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of Resources or otherwise operate as a discharge of Resources or Finance Co. as a matter of law or equity. Resources further agrees that its obligations hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Finance Co. Obligation is rescinded or must otherwise be restored by the Agent or any Bank upon the bankruptcy or reorganization of Finance Co or otherwise. In furtherance of the foregoing and not in limitation of any other right which the Agent or any Bank may have at law or in equity against Resources by virtue hereof, upon the failure of Finance Co. to pay any Finance Co. Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, Resources hereby promises to and 43 will, upon receipt of written demand by the Agent, forthwith pay, or cause to be paid, in cash the amount of such unpaid Finance Co. Obligation. Upon payment by Resources of any Finance Co. Obligation, each Bank shall, in a reasonable manner, assign the amount of such Finance Co. Obligation owed to it and so paid to Resources, such assignment to be pro tanto to the --- ----- extent to which the Finance Co. Obligation in question was discharged by Resources, or make such disposition thereof as Resources shall direct (all without recourse to any Bank and without any representation or warranty by any Bank). Upon payment by Resources of any sums as provided above, all rights of Resources against Finance Co. arising as a result thereof by way of right of subrogation or otherwise shall in all respects be subordinate and junior in right of payment to the prior indefeasible payment in full of all the Finance Co. Obligations owed by Finance Co. to the Banks. SECTION 10. Miscellaneous. ------------- 10.1 Definitions. As used herein the following terms shall have the ----------- meanings herein specified and shall include in the singular number the plural and in the plural number the singular: "5-Year Agreement" shall mean the $300,000,000 5-Year Revolving Credit ---------------- Agreement dated as of November 20, 1997, among PPL, Finance Co., Resources, as guarantor of the obligations of Finance Co., the banks from time to time party thereto and The Chase Manhattan Bank, as fronting bank, collateral agent and as agent for the banks party thereto. "Affected Bank" shall have the meaning assigned that term in (S) ------------- 2.5(c). "Agent" shall mean The Chase Manhattan Bank and shall include (i) any ----- successor corporation thereto by merger, consolidation or otherwise and (ii) any successor to the Agent appointed pursuant to (S) 8.7. "Aggregate Credit Exposure" shall mean the aggregate amount of the ------------------------- Banks' Credit Exposures. "Agreement" shall mean this Revolving Credit Agreement, as it may from --------- time to time be amended, supplemented or otherwise modified. 44 "Applicable Commitment Fee Percentage" shall mean for the Borrowers, ------------------------------------ the percentage specified as such in the table in the definition of "Applicable Rate" opposite the highest rating category in which PPL's First Mortgage Bonds have been assigned a rating by either of Moody's or S&P. "Applicable Eurodollar Margin" shall mean (i) for PPL, the margin ---------------------------- specified as such in the table in the definition of "Applicable Rate" opposite the highest rating category in which PPL's First Mortgage Bonds have been assigned ratings by either of Moody's or S&P or (ii) for Finance Co., the margin specified as such in the table in the definition of "Applicable Rate" opposite the highest rating category in which Resources' senior unsecured debt has been assigned ratings by either of Moody's or S&P. "Applicable Lending Office" shall mean, with respect to each Bank, (i) ------------------------- such Bank's Base Rate Lending Office in the case of a Base Rate Loan and (ii) such Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Loan. "Applicable Percentage" of any Bank at any time shall mean the --------------------- percentage of the Total Commitment represented by such Bank's Commitment. In the event the Commitments shall have expired or been terminated, the Applicable Percentages shall be determined on the basis of the Commitments most recently in effect, but giving effect to assignments pursuant to (S) 10.6. "Applicable Rate" shall mean and include the Applicable Commitment Fee --------------- Percentage for undrawn Commitments or Applicable Eurodollar Margin for any Loans or issued Letters of Credit and at any time will be determined based on the highest applicable Category set forth below (the highest category being Category A); provided, that on any day when the aggregate amount of outstanding Loans -------- exceeds 50% of the aggregate Commitments, the Applicable Eurodollar Margin shall be increased by 0.05%.
================================================================================ Criteria Applicable Applicable Commitment Fee Eurodollar Percentage Margin ==============================================================================
45 Category A: A- or better/ .080% .400% A3 or better Category B: BBB+/Baa1 .100% .450% Category C: BBB/Baa2 .125% .500% Category D: BBB-/Baa3 .150% .600% Category E: BB+ or below/ .200% .750% Ba1 or below
"Bank" shall have the meaning assigned that term in the first ---- paragraph in this Agreement. "Bankruptcy Code" shall have the meaning assigned that term in (S) --------------- 6.5. "Base Rate" shall mean, for any day, a rate per annum equal to the --------- higher of (i) the Prime Rate and (ii) 1/2 of 1% plus the Federal Funds Rate, each as in effect from time to time. "Base Rate Lending Office" means, with respect to each Bank, the ------------------------ office of such Bank specified as its "Base Rate Lending Office" on the signature pages to the Agreement or such other office of such Bank as such Bank may from time to time specify as such to the Borrowers and the Agent. "Base Rate Loan" shall mean any Loan during any period during which -------------- such Loan is bearing interest at the rates provided for in (S) 2.1(a). "Borrower" shall mean either PPL or Finance Co. and "Borrowers" -------- --------- shall mean PPL and Finance Co. 46 "Borrowing" shall mean the incurrence of one Type of Loan to a --------- Borrower from all the Banks on a given date, all of which Eurodollar Loans shall have the same Interest Period, pursuant to (S) 1.2; provided, however, that -------- ------- Loans to a Borrower of a different Type extended by one or more Banks pursuant to (S) 2.5(b) shall be considered a part of the related Borrowing. "Business Day" shall mean (i) for all purposes other than as covered ------------ by clause (ii) below, any day excluding Saturday, Sunday and any day on which banks in New York City are authorized by law or other governmental actions to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in U.S. dollar deposits in the London interbank Eurodollar market. "Capital Lease Obligations" of any person shall mean obligations of ------------------------- such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Closing Date" shall mean November 19, 1998. ------------ "Commitment", for each Bank, shall mean the amount specified opposite ---------- its name on Schedule I hereto, such Commitment to be reduced by the amount of any reduction thereto effected pursuant to (S) 1.7, (S) 6 and/or (S) 10.6(b)(A). "Commitment Fee" shall have the meaning assigned that term in (S) -------------- 1.6(a). "Consolidated Capitalization of PPL" shall mean the sum of (A) the ---------------------------------- Consolidated Indebtedness of PPL and (B)(i) the consolidated shareowners' equity (determined in accordance with GAAP) of the common, preference and preferred stockholders of PPL and (ii) the aggregate amount of Hybrid Preferred Securities of PPL, except that for purposes of calculating Consolidated Capitalization of PPL, Consolidated Indebtedness of PPL shall exclude Non-Recourse Indebtedness of PPL and Consolidated Capitalization of PPL shall exclude that portion of shareholder equity attributable to assets securing Non-Recourse Indebtedness of PPL. 47 "Consolidated Capitalization of Resources" shall mean the sum of (A) ---------------------------------------- the Consolidated Indebtedness of Resources and (B)(i) the consolidated shareowners' equity (determined in accordance with GAAP) of the common, preference and preferred stockholders of Resources and (ii) the aggregate amount of Hybrid Preferred Securities of Resources, except that for purposes of calculating Consolidated Capitalization of Resources, Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and Consolidated Capitalization of Resources shall exclude that portion of shareholder equity attributable to assets securing Non-Recourse Indebtedness of Resources. "Consolidated Indebtedness of PPL" shall mean the consolidated -------------------------------- Indebtedness of PPL (determined in accordance with GAAP), except that for purposes of this definition (1) Consolidated Indebtedness of PPL shall exclude Non-Recourse Indebtedness of PPL and (2) Consolidated Indebtedness of PPL shall exclude any Hybrid Preferred Securities of PPL. "Consolidated Indebtedness of Resources" shall mean the consolidated -------------------------------------- Indebtedness of Resources (determined in accordance with GAAP), except that for purposes of this definition (1) Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and (2) Consolidated Indebtedness of Resources shall exclude any Hybrid Preferred Securities of Resources. "Credit Exposure", for each Bank at any time, shall mean the aggregate --------------- principal amount at such time of all outstanding Loans of such Bank to the Borrowers plus the aggregate amount at such time of such Bank's L/C Exposure. ---- "Default" with respect to a Borrower, shall mean any event, act or ------- condition which with notice or lapse of time or both would constitute an Event of Default with respect to that Borrower. "Eligible Transferee" shall mean and include a commercial bank, ------------------- financial institution or other "accredited investor" (as defined in SEC Regulation D). "Eurodollar Lending Office" shall mean, with respect to each Bank, the ------------------------- office of such Bank specified as its "Eurodollar Lending Office" on the signature pages to the Agreement or such other office of such Bank as such Bank 48 may from time to time specify as such to the Borrowers and the Agent. "Eurodollar Loan" shall mean any loan during any period during which --------------- such Loan is bearing interest at the rates provided for in (S) 2.1(b). "Event of Default" shall mean with respect to PPL each of the Events ---------------- of Default specified in (S)6A and with respect to Finance Co., each of the Events of Default specified in (S)6B. "Expiry Date" shall mean the date 364 days from the date hereof ----------- subject to extension pursuant to Section 2.6. "Extension Letter" shall mean a letter from the Borrowers requesting ---------------- an extension of the Expiry Date substantially in the form of Exhibit C hereto. "Federal Funds Rate" shall mean for any day, a fluctuating interest ------------------ rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal Funds brokers of recognized standing selected by the Agent. "Finance Co." shall have the meaning assigned that term in the first ----------- paragraph of this Agreement. "Finance Co. Obligations" shall mean all obligations of Finance Co. ----------------------- under this Agreement to pay (i) the principal of and interest on the Loans and LC Disbursements when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, and (ii) all other payment obligations of Finance Co. hereunder. "First Mortgagee Bonds" shall mean the first mortgage bonds issued by --------------------- PPL pursuant to its Mortgage and Deed of Trust dated as of October 1, 1945, as supplemented. "GAAP" shall mean United States generally accepted accounting ---- principles applied on a consistent basis. 49 "Guarantee" of or by any person shall mean any obligation, contingent --------- or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the "primary obligor") in any --------------- manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for payment of such Indebtedness, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the -------- ------- term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Hybrid Preferred Securities of PPL" means (1) the preferred ---------------------------------- securities and subordinated debt described in the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and PPL and the preferred securities and subordinated debt described in the Prospectus dated as of June 9, 1997 of PP&L Capital Trust II and PPL (collectively, the "Existing TOPrS") and (2) any additional preferred securities and subordinated debt (with a maturity of at least twenty years) similar to the Existing TOPrS and in an aggregate amount not to exceed $100,000,000, issued by business trusts, limited liability companies, limited partnerships (or similar entities) (i) all of the common equity, general partner or similar interests of which are owned (either directly or indirectly through one or more wholly-owned Subsidiaries) at all times by PPL, (ii) that have been formed for the purpose of issuing hybrid preferred securities and (iii) substantially all the assets of which consist of (A) subordinated debt of PPL or a Subsidiary of PPL, as the case may be, and (B) payments made from time to time on the subordinated debt. "Hybrid Preferred Securities of Resources" means (1) the preferred ---------------------------------------- securities and subordinated debt described in the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and PPL and the preferred securities and subordinated debt described in the Prospectus dated as of June 9, 1997 of PP&L Capital Trust II and PPL (collectively, the "Existing TOPrS") and (2) any additional preferred securities and subordinated debt (with a maturity of at least twenty years) similar to the Existing TOPrS and in an aggregate amount not to exceed $100,000,000, issued by business trusts, limited liability companies, limited partnerships (or similar 50 entities) (i) all of the common equity, general partner or similar interests of which are owned (either directly or indirectly through one or more wholly-owned Subsidiaries) at all times by Resources or PPL, (ii) that have been formed for the purpose of issuing hybrid preferred securities and (iii) substantially all the assets of which consist of (A) subordinated debt of Resources or a Subsidiary of Resources, as the case may be, and (B) payments made from time to time on the subordinated debt. "Indebtedness" of any person shall mean, without duplication, (a) all ------------ obligations of such person for borrowed money, (b) all obligations of such person with respect to deposits or advances of any kind, (c) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien or property owned or acquired by such person, whether or not the obligations secured thereby have been assumed but shall not include any obligations that are without recourse to such person, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of Interest Rate Protection Agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements (the amount of any such obligation to be the amount that would be payable upon the acceleration, termination or liquidation thereof) and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances. "Interest Period" shall mean (a) as to any Eurodollar Loan, the --------------- period commencing on the date of such Loan and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the applicable Borrower may elect in a Notice of Borrowing or Notice of Conversion and (b) as to any Base Rate Loan, the period commencing on the date of such Loan and ending on the date 90 days thereafter or, if earlier, on the Expiry Date or the date of prepayment of such Loan. If any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest -------- 51 Period applicable to a Borrowing of Eurodollar Loans would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day. "Interest Rate Protection Agreement" shall mean any agreement ---------------------------------- providing for an interest rate swap, cap or collar, or for any other financial arrangement designed to protect against fluctuations in interest rates. "L/C Commitment" shall mean the commitment of the Fronting Bank to -------------- issue Letters of Credit pursuant to (S) 1A. "L/C Disbursement" shall mean a payment or disbursement made by the ---------------- Fronting Bank pursuant to a Letter of Credit. "L/C Exposure" shall mean at any time the sum of (a) the aggregate ------------ undrawn amount of all outstanding Letters of Credit at such time plus (b) the ---- aggregate principal amount of all L/C Disbursements that have not yet been reimbursed at such time. The L/C Exposure of any Bank at any time shall mean its Applicable Percentage of the aggregate L/C Exposure at such time. "L/C Participation Fee" shall have the meaning assigned to such term --------------------- in (S) 1.6(b). "Letter of Credit" shall mean any letter of credit issued pursuant to ---------------- (S) 1A. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed ---- of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vender or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan" shall have the meaning assigned that term in (S) 1.1. ---- "Loan Documents" shall have the meaning assigned that term in (S) 8.1. -------------- "Moody's" shall mean Moody's Investors Service, Inc. or any successor ------- thereto. 52 "Non-Recourse Indebtedness of PPL" shall mean indebtedness that is -------------------------------- nonrecourse to PPL or any of its Subsidiaries. "Non-Recourse Indebtedness of Resources" shall mean indebtedness that -------------------------------------- is nonrecourse to Resources, either Borrower or any of PPL's Subsidiaries. "Notice of Borrowing" shall have the meaning assigned that term in (S) ------------------- 1.2. "Notice of Conversion" shall have the meaning assigned that term in -------------------- (S) 2.4(a). "Payment Office" shall mean the office of the Agent located at 270 -------------- Park Avenue, New York, New York 10017, or such other office as the Agent may hereafter designate in writing as such to the other parties hereto. "Permitted Liens" shall mean (a) Liens for taxes, assessments or --------------- governmental charges or levies to the extent not past due, or which are being contested in good faith in appropriate proceedings for which Resources has provided appropriate reserves for the payment thereof in accordance with GAAP; (b) pledges or deposits in the ordinary course of business to secure obligations under worker's compensation laws or similar legislation; (c) other pledges or deposits in the ordinary course of business (other than for borrowed monies) that, in the aggregate, are not material to Resources; (d) Liens imposed by law such as materialmen's, mechanics', carriers', workers' and repairmen's Liens and other similar Liens arising in the ordinary course of business for sums not yet due or currently being contested in good faith by appropriate proceedings; (e) attachment, judgment or other similar Liens arising in connection with court proceedings, provided that such Liens, in the aggregate, shall not exceed $50,000,000 at any one time outstanding, and (f) other Liens not otherwise referred to in the foregoing clauses (a) through (e) above, provided that such other Liens do not secure at any time obligations in an aggregate amount in excess of $100,000,000 at any time outstanding. "Persons" shall mean and include any individual, firm, corporation, ------- association, trust or other enterprise or any governmental or political subdivision or agency, department or instrument thereof. 53 "PPL" shall have the meaning assigned that term in the first paragraph --- of this Agreement. "Prime Rate" shall mean the rate which The Chase Manhattan Bank ---------- announces from time to time as its prime lending rate, such Prime Rate to change when and as such prime lending rate changes. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Chase Manhattan Bank may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "Quoted Rate" shall mean, with respect to any Eurodollar Loan for any ----------- Interest Period, the average rate (rounded upwards to the nearest 1/16 of 1%) at which dollar deposits approximately equal in principal amount to the Agent's portion of such Eurodollar Loan and for a maturity comparable to such Interest Period are offered to the principal London office of the Reference Banks in immediately available funds in the London interbank market at approximately 11:00 A.M. (London time) 2 Business Days prior to the commencement of such Interest Period, without any addition to such offered quotation to give effect to the reserve requirements established for Eurodollar transactions by Regulation D. Each Reference Bank shall use its best efforts to furnish rates to the Agent as contemplated hereby. If any one of the Reference Banks shall be unable or otherwise fail to supply such rates to the Agent upon its request, the applicable rate shall be determined on the basis of the rates submitted by the remaining two Reference Banks. If more than one Reference Bank shall be unable or otherwise fail to supply such rates, there shall be no applicable rate. "Reference Banks" shall mean The Chase Manhattan Bank, Citibank, N.A. --------------- and Morgan Guaranty Trust Company. "Register" shall have the meaning provided in 1.4(b). -------- "Regulation D" shall mean Regulation D of the Board of Governors of ------------ the Federal Reserve System as from time to time in effect or any successor to all or a portion thereof establishing reserve requirements. "Required Banks" shall mean Banks having Loans the outstanding -------------- principal amount of which aggregate (or, if no Loans are outstanding, Banks with Commitments aggregating) at least the majority of the aggregate outstanding principal amount of all Loans (or of the Total Commitment). 54 "Resources" shall have the meaning assigned that term in the first --------- paragraph of this Agreement. "SEC" shall have the meaning assigned that term in (S) 5.1(c). --- "SEC Regulation D" shall mean Regulation D as promulgated under the ---------------- Securities Act of 1933, as amended, as the same may be in effect from time to time." "S&P" shall mean Standard & Poor's Ratings Group or any successor --- thereto. "Subsidiary" shall mean any company, partnership, association or other ---------- business entity in which any Person and its Subsidiaries now have or may hereafter acquire an aggregate of at least 50% of the voting stock or ownership interests. "Taxes" shall have the meaning assigned that term in (S) 3.4. ----- "Total Commitment" shall mean the aggregate of all the Commitments of ---------------- all the Banks. "Type" shall mean any type of Loan, i.e., whether a Loan is a Base ---- ---- Rate Loan or a Eurodollar Loan. "Unaffected Bank" shall have the meaning assigned that term in (S) --------------- 2.5(c). "written" or "in writing" shall mean any form of written communication ------- ---------- or a communication by means of telex, telecopier device, telegraph or cable. 10.2 Accounting Principles. All statements to be prepared and --------------------- determinations to be made under this Agreement, including (without limitation) those pursuant to (S) 5, shall be prepared and made in accordance with generally accepted accounting principles applied on a basis consistent with the accounting principles reflected in the audited financial statements of PPL and Resources for the fiscal year ended December 31, 1997, referred to in (S) 7.4, except for changes in accounting principles consistent with GAAP. 10.3 Exercise of Rights. Neither the failure nor delay on the part ------------------ of any of the Banks or the Fronting Bank to exercise any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise there- 55 of, or the exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Banks would otherwise have. No notice to or demand on PPL, Finance Co. or Resources in any case shall entitle PPL, Finance Co. or Resources, as applicable, to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of the Banks or the Fronting Bank to any other or further action in any circumstances without notice or demand. 10.4 Amendment and Waiver. Neither this Agreement nor any other Loan -------------------- Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by PPL, Finance Co. and Resources, and the Required Banks, provided that -------- no such change, waiver, discharge or termination shall, without the consent of each Bank directly affected thereby, (i) extend the final scheduled maturity of any Loan (except as provided for in (S)2.6), or reduce the rate or extend the time of payment of interest or Commitment Fees thereon (except in connection with a waiver of the applicability of any post-default increase in interest rates), or reduce the principal amount thereof (except to the extent repaid in cash), (ii) amend, modify or waive any provision of this (S) 10.4, (iii) reduce the percentage specified in the definition of Required Banks or (iv) consent to the assignment or transfer by PPL, Finance Co. or Resources of any of its rights and obligations under this Agreement or the release of Resources from its guarantee hereunder; provided further, that no such change, waiver, discharge or ---------------- termination shall (x) increase the Commitments of any Bank over the amount thereof then in effect without the consent of such Bank (it being understood that waivers or modifications of conditions precedent, covenants, Defaults or Events of Default shall not constitute an increase of the Commitment of any Bank) or (y) without the consent of the Agent, amend, modify or waive any provision of (S) 8 as such Section applies to such Agent or any other provision as such Section relates to the rights or obligations of such Agent. 10.5 Expenses; Indemnification. (a) The Borrowers agree to pay all ------------------------- reasonable out-of-pocket expenses (i) of the Agent and the Fronting Bank incurred in connection with the preparation, execution, delivery, enforcement and administration (exclusive of any internal overhead expenses) of this Agreement and any and all agreements supplementary hereto and the making and repayment of the Loans, the issuance of the Letters of Credit and the payment of interest, including, without limitation, the reasonable fees and expenses of Cravath, Swaine & Moore, counsel for the 56 Agent and (ii) of the Agent, the Fronting Bank and each Bank incurred in connection with the enforcement of this Agreement, including, without limitation, the reasonable fees and expenses of any counsel for any of the Banks with respect to such enforcement; provided that none of the Borrowers or -------- Resources shall be liable for any fees, charges or disbursements of any counsel for the Banks or the Agent other than Cravath, Swaine & Moore associated with the preparation, execution and delivery of this Agreement and the closing documentation contemplated hereby. (b) The Borrowers further agree to pay, and to save the Agent, the Fronting Bank and the Banks harmless from all liability for, any stamp or other documentary taxes which may be payable in connection with the Borrowers' execution or delivery of this Agreement, their borrowings hereunder or Letters of Credit, or the issuance of any notes or of any other instruments or documents provided for herein or delivered or to be delivered by each of them hereunder or in connection herewith. (c) The Borrowers agree to indemnify the Agent, the Fronting Bank and each Bank and each of their respective affiliates, directors, officers and employees (each such person being called an "Indemnitee") against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent, the Fronting Bank or any Bank is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby, the direct or indirect application or proposed application of the proceeds of any Loan hereunder or the issuance of Letters of Credit; provided that such indemnification shall not -------- extend to disputes solely among the Agent, the Fronting Bank and the Banks; and provided further that such indemnity shall not, as to any Indemnitee, be - -------- ------- available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (d) All obligations provided for in this (S) 10.5 shall survive any termination of this Agreement or the resignation, withdrawal or removal of any Bank. 10.6 Successors and Assigns. (a) This Agreement shall be binding ---------------------- upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that none of PPL, Finance Co. or -------- 57 Resources may assign or transfer any of its interests hereunder, except to the extent any such assignment results from the consummation of a transaction permitted under (S) 5.2, without the prior written consent of the Banks and provided further that the right of each Bank to transfer, assign or grant - ---------------- participations in its rights and/or obligations hereunder shall be limited as set forth below in this (S) 10.6, provided that nothing in this (S) 10.6 shall -------- prevent or prohibit any Bank from pledging its rights under this Agreement and/or its Loans hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank. In order to facilitate such an assignment to a Federal Reserve Bank, the Borrowers shall, at the request of the assigning Bank, duly execute and deliver to the assigning Bank a promissory note evidencing its Commitment or Loans made by the assigning Bank hereunder. (b) Each Bank shall have the right to transfer, assign or grant participations in all or any part of its remaining rights and obligations hereunder on the basis set forth below in this clause (b). (A) Assignments. Each Bank may assign all or a portion of its ----------- rights and obligations hereunder pursuant to this clause (b)(A) to (x) one or more Banks or any affiliates of any Bank or (y) one or more other Eligible Transferees, provided that (i) any such assignment -------- pursuant to clause (y) above shall be in the aggregate amount of at least $5,000,000, (ii) after giving effect to any such assignment pursuant to clause (x) or (y) above, no Bank shall have a Commitment of less than $5,000,000 unless such Bank's Commitment is reduced to zero pursuant to such assignment, (iii) unless the Borrowers and the Administrative Agent shall otherwise agree, the assigning Bank shall not assign any of its rights and obligations under this Agreement without assigning the same percentage of its rights and obligations under the 5-Year Agreement, provided that no Banks shall be required -------- to make an assignment under the 5-Year Agreement with respect to assignments made pursuant to (S) 2.6 hereunder, (iv) any assignment pursuant to clause (y) shall require the consent of the Borrowers, which consent shall not be unreasonably withheld, and provided -------- further, that, so long as no Loans or interest thereon shall be ------- outstanding and no Default or Event of Default shall have occurred with respect to PPL, Finance Co. or 58 Resources and then be continuing, the Borrowers may at their option terminate the portion of such assigning Bank's Commitment proposed to be assigned pursuant to clause (y) above in lieu of consenting to such assignment, and the Total Commitment shall be reduced in the amount of such termination. Assignments or terminations of all or any portion of any Bank's Commitment pursuant to this clause (b)(A) will only be effective if the Agent shall have received a written notice from the assigning Bank and the assignee, or, in the case of a termination, the Borrowers, and, in the case of an assignment, payment of a nonrefundable assignment fee of $2,500 to the Agent by either the assigning Bank or the assignee. No later than five Business Days after its receipt of any written notice of assignment or termination, the Agent will record such assignment or termination, and the resultant effects thereof on the Commitment of the assigning or terminating Bank and, in the case of an assignment, the assignee, in the Register, at which time such assignment or termination shall become effective, provided that the Agent shall not be required to, and shall not, so -------- record any assignment or termination in the Register on or after the date on which any proposed amendment, modification or supplement in respect of this Agreement has been circulated to the Banks for approval until the earlier of (x) the effectiveness of such amendment, modification or supplement in accordance with (S) 10.4 or (y) 30 days following the date on which such proposed amendment, modification or supplement was circulated to the Banks. Upon the effectiveness of any assignment or termination pursuant to this clause (b)(A), (x) the assignee, in the case of an assignment, will become a "Bank" for all purposes of this Agreement and the other Loan Documents with a Commitment as so recorded by the Agent in the Register, and to the extent of such assignment or termination, the assigning or terminating Bank shall be relieved of its obligations hereunder with respect to the portion of its Commitment being assigned or terminated. (B) Participations. Each Bank may transfer, grant or assign -------------- participations in all or any part of such Bank's interests and obligations hereunder pursuant to this clause (b)(B) to any Eligible Transferee, provided that (i) such Bank shall remain a "Bank" for all -------- purposes of this Agreement 59 and the transferee of such participation shall not constitute a Bank hereunder and (ii) no participant under any such participation shall have any rights under the Agreement or other Loan Document or any rights to approve any amendment to or waiver of this Agreement or any other Loan Document except to the extent such amendment or waiver would (x) extend the final scheduled maturity of any of the Loans or the Commitment in which such participant is participating, (y) reduce the interest rate (other than as a result of waiving the applicability of any post-default increases in interest rates) or Commitment Fee or other fees applicable to any of the Loans or Commitments in which such participant is participating or postpone the payment of any thereof or reduce the principal amount of any Loan (except to the extent repaid in cash) or (z) release Resources from its obligations as a guarantor hereunder. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Loan Documents (the participant's rights against the granting Bank in respect of such participation to be those set forth in the agreement with such Bank creating such participation) and all amounts payable by each of the Borrowers hereunder shall be determined as if such Bank had not sold such participation, provided that such participant shall -------- be entitled to receive additional amounts under (S)(S) 1.8 and 2.5 on the same basis as if it were a Bank but in no case shall be entitled to any amount greater than would have been payable had the Bank not sold such participations. (c) Each Bank hereby represents, and each Person that becomes a Bank pursuant to an assignment permitted by the preceding clause (b)(A) will upon its becoming party to this Agreement represent, that it is an Eligible Transferee which makes loans in the ordinary course of its business and that it will make or acquire Loans for its own account in the ordinary course of such business, provided that, subject to the preceding clauses (a) and (b), the disposition of - -------- any promissory notes or other evidences of or interests in Loans held by such Bank shall at all times be within its exclusive control. 10.7 Notices, Requests, Demands. All notices, requests, demands or -------------------------- other communications to or upon the respective parties hereto shall be deemed to have been given or made (i) in the case of notice by mail, when actually received, and (ii) in the case of telecopier notice sent 60 over a telecopier machine owned or operated by a party hereto, when sent, in each case addressed to the party or parties to which such notice is given at their respective addresses shown below their signatures hereto or at such other address as such party may hereafter specify in writing to the others. No other method of giving notice is hereby precluded. 10.8 Survival of Representations and Warranties. All representations ------------------------------------------ and warranties contained herein or otherwise made in writing by PPL, Finance Co. or Resources in connection herewith shall survive the execution and delivery of this Agreement. 10.9 Governing Law. This Agreement and the rights and obligations of ------------- the parties under this Agreement (other than as relates to Letters of Credit) shall be governed by and construed and interpreted in accordance with the laws of the State of New York. Each Letter of Credit shall be governed by, and construed and interpreted in accordance with the laws or rules designated in such Letter of Credit, or if no such laws or rules are designated, the Uniform Customs and Practice for Documentary Credits (1993 revision), International Chamber of Commerce, publication no. 500 (the "Uniform Customs") and, as to matters not governed by the Uniform Customs, the laws of the State of New York. 10.10 Counterparts. This Agreement may be executed in any number of ------------ copies, and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument. Complete counterparts of this Agreement shall be lodged with each Borrower, Resources and the Agent. 10.11 Effectiveness. This Agreement shall become effective on the ------------- Closing Date. 10.12 Transfer of Office. (a) Each Bank may transfer and carry its ------------------ Loans at, to or for the account of any branch office, subsidiary or affiliate of such Bank; provided that such Bank shall continue to bear all of its obligations -------- under this Agreement; and provided further that the Borrowers shall not be -------- ------- responsible for costs arising under (S) 1.8, 2.5 or 3.4 resulting from any such transfer to the extent not otherwise applicable to such Bank prior to such transfer. (b) Upon a Bank becoming aware of any event which will entitle it to any additional amount pursuant to (S) 2.5(a) or (S) 3.4, such Bank shall take all reasonable steps 61 (including but not limited to making, maintaining or funding the affected Loan through another office of such Bank) to avoid or reduce the additional amount payable by the applicable Borrower; provided that, such steps will not result in any additional costs, liabilities or expenses (not reimbursable by the applicable Borrower) to such Bank and are not otherwise inconsistent with the interests of such Bank determined in good faith. 10.13 Proration of Payments. The Banks agree among themselves that, --------------------- with respect to all amounts received by them which are applicable to the payment of principal of or interest on the Loans, equitable adjustment will be made so that, in effect, all such amounts will be shared ratably among the Banks on the basis of the amounts then owed each of them in respect of such obligation, whether received by voluntary payment, by realization upon security, by the exercise of any right of set-off or bankers' lien, by counterclaim or cross action, under or pursuant to this Agreement or otherwise. Each of the Banks agrees that if it should receive any payment on its Loans of a sum or sums in excess of its pro rata portion (other than as expressly contemplated by (S) --- ---- 2.6(ii)), then the Bank receiving such excess payment shall purchase for cash from the other Banks an interest in the Loans of such Banks in such amount as shall result in a ratable participation by each of the Banks in the aggregate unpaid amount of all outstanding Loans then held by all of the Banks. If all or any portion of such excess payment is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. The Borrowers agree that any Bank so purchasing a participation from another Bank pursuant to this (S) 10.13 may exercise all its rights with respect to such participation as fully as if such Bank were the direct creditor of the Borrowers in the amount of such participation. 10.14 Jurisdiction; Consent to Service of Process. (a) Each of PPL, -------------------------------------------- Finance Co. and Resources hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the 62 extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Agent, the Fronting Bank or any Bank may otherwise have to bring any action or proceeding relating to this Agreement against any of PPL, Finance Co., Resources or its properties in the courts of any jurisdiction. (b) Each of PPL, Finance Co. and Resources hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (a) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10.7. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. 10.15 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE --------------------- FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 10.16 Headings Descriptive. The headings of the various provisions of -------------------- this Agreement are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 63 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written. PP&L, INC., By /s/ James E. Abel ----------------------------------- Name: James E. Abel Title: Treasurer PP&L CAPITAL FUNDING, INC., By /s/ James E. Abel ----------------------------------- Name: James E. Abel Title: Treasurer PP&L RESOURCES, INC., By /s/ John R. Biggar ----------------------------------- Name: John R. Biggar Title: Senior Vice President and Chief Financial Officer THE CHASE MANHATTAN BANK, Individually and as Agent and Fronting Bank By /s/ Thomas H. Kozlark ----------------------------------- Name: Thomas H. Kozlark Title: Vice President CITIBANK, N.A., Individually and as Documentation Agent By /s/ Anita J. Brickell ----------------------------------- Name: Anita J. Brickell Title: Managing Director THE BANK OF NEW YORK, By /s/ John N. Watt ----------------------------------- Name: John N. Watt Title: Vice President THE BANK OF NOVA SCOTIA, By /s/ J. Alan Edwards ----------------------------------- Name: J. Alan Edwards Title: Authorized Signatory CREDIT SUISSE FIRST BOSTON, By /s/ James P. Moran ----------------------------------- Name: James P. Moran Title: Director By /s/ Douglas E. Maher ----------------------------------- Name: Douglas E. Maher Title: Vice President DEUTSCHE BANK AG, NEW YORK BRANCH and/or CAYMAN ISLANDS BRANCH, By /s/ Lydia Zaininger ----------------------------------- Name: Lydia Zaininger Title: Vice President By /s/ Michael A. Hamilton ----------------------------------- Name: Michael A. Hamilton Title: Associate THE FIRST NATIONAL BANK OF CHICAGO, By /s/ Madeleine N. Pember ----------------------------------- Name: Madeleine N. Pember Title: Assistant Vice President FIRST UNION NATIONAL BANK, By /s/ Michael J. Kolosowsky ----------------------------------- Name: Michael J. Kolosowsky Title: Vice President MORGAN GUARANTY TRUST COMPANY, By /s/ Robert Bottamedi ----------------------------------- Name: Robert Bottamedi Title: Vice President MELLON BANK, N.A., By /s/ Mark W. Rogers ----------------------------------- Name: Mark W. Rogers Title: Vice President NATIONSBANK, N.A., By /s/ Paula Z. Kramp ----------------------------------- Name: Paula Z. Kramp Title: Vice President TORONTO DOMINION (TEXAS),INC., By /s/ Sonja R. Jordan ----------------------------------- Name: Sonja R. Jordan Title: Vice President Bank Address Schedule ---------------------
- ------------------------------------------------------------------------------------------------ PHONE NAME OF BANK AND ADDRESS FAX NUMBER(S) NUMBER(S) - ------------------------------------------------------------------------------------------------ The Chase Manhattan Bank Attn: Jaimin Patel (212) 270-1354 (212) 270-2101 270 Park Avenue New York, NY 10017 - ------------------------------------------------------------------------------------------------ THE BANK OF NEW YORK Attn: John Watt (212) 635-7533 (212) 635-7923 One Wall Street New York, NY 10286 - ------------------------------------------------------------------------------------------------ THE BANK OF NOVA SCOTIA Attn: Phil Adsetts (212) 225-5010 (212) 225-5090 One Liberty Plaza 26th Floor New York, NY 10006 - ------------------------------------------------------------------------------------------------ CITIBANK, N.A. Attn: Anita Brickell (212) 559-1288 (212) 583-7185 Robert Harrity (212) 559-6482 (212) 793-6130 Cecelia Leyden (212) 559-4354 (212) 793-6130 399 Park Avenue 9th Floor New York, NY 10043 - ------------------------------------------------------------------------------------------------ CREDIT SUISSE FIRST BOSTON Attn: James Moran (212) 325-9176 (212) 325-8314 11 Madison Avenue 20th Floor New York, NY 10010 - ------------------------------------------------------------------------------------------------ DEUTSCHE BANK AG Attn: Lydia Zaininger (212) 469-8634 (212) 429-8256 31 West 52nd Street 24th Floor - ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------ PHONE NAME OF BANK AND ADDRESS FAX NUMBER(S) NUMBER(S) - ------------------------------------------------------------------------------------------------ New York, NY 10019 - ------------------------------------------------------------------------------------------------ THE FIRST NATIONAL BANK OF CHICAGO Attn: Kenneth Bauer (312) 732-6282 (312) 732-3055 Madeleine Pember (312) 732-9727 One First National Plaza Suite 0360 Chicago, IL 60670 - ------------------------------------------------------------------------------------------------ FIRST UNION NATIONAL BANK Attn: Brian Tate (704) 383-0510 (704) 383-6670 301 South College Street 5th Floor Charlotte, NC 28288-0735 - ------------------------------------------------------------------------------------------------ MORGAN GUARANTY TRUST COMPANY Attn: Jim Finch (212) 648-7141 (212) 648-5014 Clifford Potter (212) 648-8672 J.P. Morgan 60 Wall Street New York, NY 10005 - ------------------------------------------------------------------------------------------------ MELLON BANK, N.A. Attn: Mary Ellen Usher (412) 236-1203 (412) 236-1840 Mark Rogers (412) 234-1888 1 Mellon Bank Center Suite 4425 Pittsburgh, PA 15258-0001 - ------------------------------------------------------------------------------------------------ NATIONSBANK, N.A. Attn: Paula Kramp (301) 571-0713 (301) 571-0719 Lawrence Saunders (301) 571-0704 6610 Rockledge Drive, 6th Fl. Bethesda, MD 20817 - ------------------------------------------------------------------------------------------------ TORONTO DOMINION (TEXAS), INC. Attn: Katherine Lucey (212) 468-0785 (212) 262-1929 31 West 52nd Street New York, NY 10019-6101 - ------------------------------------------------------------------------------------------------
SCHEDULE I
BANK COMMITMENT - ---- ---------- THE CHASE MANHATTAN BANK..................................... $ 40,000,000 CITIBANK, N.A................................................ $ 40,000,000 THE BANK OF NEW YORK......................................... $ 30,000,000 THE BANK OF NOVA SCOTIA...................................... $ 30,000,000 CREDIT SUISSE FIRST BOSTON................................... $ 32,000,000 DEUTSCHE BANK AG............................................. $ 10,000,000 THE FIRST NATIONAL BANK OF CHICAGO........................... $ 32,000,000 FIRST UNION NATIONAL BANK.................................... $ 32,000,000 MORGAN GUARANTY TRUST COMPANY................................ $ 30,000,000 MELLON BANK, N.A............................................. $ 32,000,000 NATIONSBANK, N.A............................................. $ 32,000,000 TORONTO DOMINION (TEXAS), INC................................ $ 10,000,000 TOTAL COMMITMENT......................... $350,000,000
EXHIBIT C [Form of Extension Letter] [Date]/1/ The Chase Manhattan Bank 270 Park Avenue New York, NY 10017 Attention: The Chase Manhattan Bank, as Agent and as Fronting Bank, and the Banks party to the Credit Agreement Re: Extension of Expiry Date Ladies and Gentlemen: Reference is hereby made to that certain 364-Day Revolving Credit Agreement dated as of November 20, 1997, as amended and restated as of November 19, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among PP&L, Inc. ("PPL"), PP&L Capital Funding, Inc. ("Finance Co.") and PP&L Resources, Inc. ("Resources"), the banks party thereto (the "Banks"), The Chase Manhattan Bank, as fronting bank and as agent for the Banks. Terms used and not defined herein shall have the meaning assigned to such terms in the Credit Agreement. ____________________ /1/ This Letter shall be delivered to the Agent not less than 30 and not more than 45 days prior to the Current Expiry Date. 1. Prior to giving effect to the extension referred to below, the Expiry Date is __________ (the "Current Expiry Date"). 2. PPL and Finance Co. hereby request that the Expiry Date be extended to _________./2/ 3. Pursuant to Section 2.6 of the Credit Agreement, such extension of the Current Expiry Date shall become effective on the 20th day prior to the Current Expiry Date if (and only if) Banks holding Commitments that aggregate at least 51% of the Total Commitment on such date shall have agreed to such extension as evidenced by their signatures below. This letter may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one instrument. The delivery by telecopy of an executed counterpart hereof shall be effective as delivery of an original manually executed counterpart. Very truly yours, PP&L, Inc. PP&L Capital Funding, Inc. By: By: ______________________________ ______________________________ ______________________________ ______________________________ Name: Name: Title: Title: ___________________ /2/ Such date shall be 364 days after the Current Expiry Date. EXHIBIT C Page 3 PP&L Resources, Inc. By: ______________________________ ______________________________ Name: Title: Acknowledged and agreed to as of the date noted above: THE CHASE MANHATTAN BANK, individually and as [BANK] Agent, Collateral Agent and Fronting Bank, By: By: ______________________________ ______________________________ ______________________________ ______________________________ Name: Name: Title: Title: EX-10.(C) 6 CREDIT AGREEMENT- THE CHASE MANHATTAN BANK Exhibit 10(c) James E. Abel PP&L, Inc. Treasurer Two North Ninth Street 610.774.5987 Allentown, PA 18101-1179 Fax: 610.774.5106 610.774.5151 E-mail: jeabel@papl.com http://www.papl.com/ July 8, 1998 Mr. Jaimin Patel Vice President Chase Securities, Inc. 270 Park Avenue New York, NY 10017 Dear Jaimin: Pursuant to our conversations, The Chase Manhattan Bank (the "Bank") is making available to PP&L Capital Funding, Inc. (the "Company") a line of credit in the aggregate principal amount of $80,000,000.00 (the "Facility"). The Facility will commence on the date hereof and terminate on July 7, 1999 (the "Termination Date"), unless sooner terminated in accordance herewith or with the Note (as hereinafter defined); provided that the Termination Date may be extended from the initial or any extended Termination Date upon written request of the Company to the Bank not more than 45 days nor less than 30 days prior to the Termination Date, and approval of such extension by the Bank. Approval of any such extension shall be in the sole discretion of the Bank. The Bank's approval of such extension shall be provided by written notice to the Company specifying the date to which the Termination Date is extended. Notwithstanding the foregoing, the Termination Date shall in no event be extended to a date that is more than 364 days from the date of such notice. Failure of the Bank to provide written notice of approval of such extension shall be deemed to mean that the Facility is not so extended. Borrowings under this Facility shall become due and payable without setoff, counterclaim or deduction whatsoever on the date selected by the Company in the Request (as hereinafter defined) with respect to each advance, not later than the Termination Date, and will be evidenced by a promissory note in the form of Exhibit A attached hereto (the "Note"). Provided that the aggregate principal amount outstanding at any one time does not exceed $80,000,000.00, borrowings may be effected using either of the following alternatives: 1. Domestic Dollar Loans maturing not later than the Termination Date, bearing an annual interest rate equal to the higher of (i) the Bank's floating prime lending rate (calculated on the basis of a 365-day year) as announced from time to time; and (ii) .5% in excess of the Bank's overnight Federal Funds Rate (calculated on the basis of a 360-day year) which shall mean the per annum rate at which the Bank can acquire federal funds in the interbank overnight federal funds market; this rate (the "Base Rate") to be determined daily; or Page 2 2. Eurodollar Loans with maturities of one, two, or three months (but in no event shall a Eurodollar Loan mature later than the Termination Date), bearing an annual interest rate (calculated on the basis of a 360-day year for the actual number of days elapsed) equal to .30% over the London interbank Offered Rate, as quoted by the Bank, for periods and in amounts corresponding to the terms of such Eurodollar Loans two London business days prior to the date of the requested advance. Interest on each Domestic Dollar Loan and Eurodollar Loan (individually a "Loan" and collectively the "Loans") is due and payable at the maturity thereof and, if such maturity is longer than one month, at one month intervals after the making of such Loan. Domestic Dollar Loans shall be prepayable at any time without premium or penalty. In the event the Company repays any Eurodollar Loan on any day other than the last day of an interest period therefor (whether by acceleration or otherwise), the Company shall pay to the Bank, on demand, any resulting loss or expense incurred by the Bank including, without limitation, any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. All amounts not paid when due on any Loan (whether by acceleration or otherwise) will bear interest payable on demand at a rate equal to 1% in excess of the Base Rate. The Bank expressly reserves the right to suspend offering Eurodollar Loans if the Bank determines that making or maintaining any such Loan shall have become impracticable or unlawful or if the effective cost thereof to the Bank shall exceed the quoted rate of interest with respect thereto. BORROWING NOTIFICATION AND FUNDING PROVISIONS Minimum drawdowns for all Loans made under this Facility shall be $10,000,000.00. Loans hereunder may be effected by telephone request ("Request") by those individuals authorized to request such Loans as designated in writing to the Bank by the Company's Treasurer. A request for any Loan is deemed as confirmation by the Company that no event as described in paragraph 2 of the Note shall have occurred and be continuing and that all representations and warranties contained in this letter agreement are true as of the date of the borrowing as if made on such date. Upon receipt of such Request, the Bank shall transfer the amount of the Loan in immediately available funds to the Company's Account Number 28065 with Mellon Bank, Delaware, ABA No. 031100047 or such other bank account of the Company as may be directed in writing by the Company's Treasurer. For Domestic Dollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. on the date on which the funds are required. For Eurodollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. at least three business days prior to the date on which the funds are required. LOAN DOCUMENTATION The Bank shall record all borrowings and repayments of principal and interest and the dates of such transactions on its records. The Company agrees that the Bank's records, barring manifest evidence to the contrary, shall conclusively evidence the Company's outstanding obligations under the terms of this letter agreement and Note. FACILITY FEE The Company agrees to pay to the Bank a facility fee (the "Fee") of .10% per annum on the aggregate amount of the Facility. This Fee, which shall be based on the actual number of days elapsed on a 360-day year, shall begin to accrue on the date hereof and shall be Page 3 payable in arrears on the last business day of each calendar quarter and on any date on which the Bank's commitment hereunder shall be terminated in full. All payments made by the Company under this letter agreement or the Note will be made to the Bank at 270 Park Avenue, New York, New York 10017 or such other address as the Bank may designate. CANCELLATION The Company, in its sole discretion, may cancel the whole or any part of the unused portion of the Facility in $10,000,000.00 increments by giving the Bank not less than 10 business days prior notice to that effect, specifying the date and amount of the proposed cancellation. REPRESENTATIONS AND WARRANTIES The Company has full power and authority to enter into this letter agreement, to execute and deliver the Note and to incur the obligations provided for herein and therein, all of which have been duly authorized by all proper and necessary corporate action. Except as provided by applicable laws of bankruptcy, insolvency, liquidation, or other laws of general application: (i) this letter agreement constitutes, and the Note, when issued and delivered pursuant hereto, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms; and (ii) the Loans will rank pari passu in respect of priority of payment with all other senior unsecured indebtedness of the Company. The execution, delivery and performance of its obligations under this Agreement and the Note will not violate in any material respect any provisions of any agreement to which the Company is bound and will not be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time) a default under any such agreement or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. The audited balance sheet of PP&L Resources, Inc. ("Resources"), parent corporation of the Company, on a consolidated basis as of December 31, 1997 together with audited statements of income and expense, retained earnings, paid in capital and surplus and changes in financial position, together with notes thereto, for the fiscal year then ended, heretofore delivered to the Bank, fairly present the financial condition of Resources and the results of its operations, as of the date and for the period referred to and have been prepared in accordance with generally accepted accounting principles consistently maintained throughout the period involved. There has been no material adverse change in the business, properties, condition (financial or other) or operations of Resources since the date of such audited financial statements which would adversely affect Resources' ability to meet its obligations under the terms of a Guarantee by Resources of the Company's obligations hereunder of even date ("Guarantee"). The Company has heretofore delivered to the Bank unaudited financial statements, specifically an income statement, balance sheet, and statement of cash flows, for the period ended December 31, 1997. There has been no material adverse change in the business, properties, condition (financial or other) or operations of the Company since the date of the statements which would adversely affect the Company's ability to meet its obligation hereunder. Page 4 FINANCIAL STATEMENTS As long as the Facility is available to the Company, the Company shall promptly provide the Bank with annual and quarterly financial statements of both the Company and Resources on a consolidated basis. Annual statements shall be supplied within 120 days from the closing of the respective annual fiscal period and Resources' statements shall be audited by a nationally recognized independent accountant. Quarterly financial statements, prepared in accordance with generally accepted principles and practices of accounting, shall be supplied within 60 days of the close of each of the first three quarters of Resources' fiscal year. The Company will provide the Bank with any other information the Bank may reasonably request from time to time. WAIVER OF JURY TRIAL Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any legal proceeding directly or indirectly arising out of or relating to this agreement or the transactions contemplated hereby (whether based on contract, tort or any other theory). Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver; and (b) acknowledges that it and the other parties hereto have been induced to enter into this agreement by, among other things, the mutual waivers and certifications in this section. INDEMNIFICATION The Company agrees to indemnify the Bank and each of its respective affiliates, directors, officers and employees (each an "Indemnitee") against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefore whether or not the Bank is a party thereto) which any of them may pay or incur arising out of or relating to the Note, this agreement, or any other agreement executed in connection therewith, the transactions contemplated hereby, or the direct or indirect application or proposed application of the proceeds of any Loan hereunder; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. DOCUMENTATION As a condition precedent to the first utilization of the Facility, the Bank shall be in possession of the following: (i) a copy of this letter agreement duly executed by the Company; (ii) a Note of the Company, evidencing loans pursuant to both Domestic Dollar Loans and Eurodollar Loans, in the form of Exhibit A attached hereto and duly executed; (iii) corporate resolutions, articles, and bylaws, and an incumbency/signature certificate of the Company and Resources; (iv) the Guarantee of Resources of the Company's obligations hereunder in the form of Exhibit B attached hereto and duly executed; Page 5 (v) a Certificate, signed by an officer of the Company, stating that (a) no default or event of default as described in paragraph 2 of the Note has occurred and is continuing as of the date of this letter agreement and Note; and (b) all representations and warranties contained in the letter agreement are true and correct as of the date of this letter agreement and Note; and (vi) a legal opinion of counsel to the Company and the Guarantor in form and substance reasonably satisfactory to the Bank. Any and all obligations and liabilities incurred under this letter agreement shall be due and payable without setoff, counterclaim or deduction whatsoever on the Termination Date. This letter agreement and the Note shall be governed by and construed in accordance with the laws of the State of New York. All letters, advices, confirmation, notices and other writing required or permitted hereunder shall be sufficient if sent by first class mail, postage prepaid, addressed to the Bank as follows: The Chase Manhattan Bank 270 Park Avenue New York, NY 10017 and to the Company as follows: PP&L Capital Funding, Inc. Two North Ninth Street Allentown, PA 18101 Attention: Mr. James E. Abel --------- Treasurer If the above stated terms and conditions are satisfactory, please sign and return to the Company the enclosed copy of this letter agreement. Very truly yours, PP&L CAPITAL FUNDING, INC. By: ______________________________ James E. Abel Treasurer AGREED TO AND ACCEPTED BY: THE CHASE MANHATTAN BANK By: _________________________ Title: _________________________ GUARANTEE OF PP&L RESOURCES, INC. --------------------------------- In order to induce The Chase Manhattan Bank (the "Bank") to extend credit to PP&L Capital Funding, Inc. (the "Company"), under the agreement between the Bank and the Company dated July 8, 1998 (the "Agreement"), PP&L Resources, Inc., (Resources) hereby irrevocably and unconditionally guarantees, as primary obligor and not merely as a surety, the Company's obligations to the Bank under the Agreement and the Note (as defined in the Agreement), whether for principal, interest, fees or otherwise (collectively, the "Company Obligations"). Resources further agrees that the due and punctual payment of Company Obligations may be extended, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its Guarantee hereunder notwithstanding any such extension or renewal of any Company Obligation. Resources waives presentment to, demand of payment from and protest to the Company of any of the Company Obligations, and also waives notice of acceptance of its obligations and notice of protest for nonpayment. The obligations of Resources hereunder shall not be affected by (a) the failure of the Bank to assert any claim or demand or to enforce any right or remedy against the Company under the provisions of this Guarantee, the Agreement, the Note or otherwise, (b) change or increase in the amount of any of the Company Obligations, whether or not consented to by Resources, or (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or any other agreement. Resources further agrees that its agreement hereunder constitutes a promise of payment when due (whether or not any bankruptcy or similar proceeding shall have stayed the accrual or collection of any of the Company Obligations or operated as a discharge thereof) and not merely of collection, and waives any right to require that any resort be had by the Bank to any balance of any deposit account or credit on the books of the Bank in favor of any other person. The obligations of Resources hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever, by reason of the invalidity, illegality or unenforceability of the Company Obligations, any impossibility in the performance of the Company Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of Resources hereunder shall not be discharged or impaired or otherwise affected by the failure of the Bank to assert any claim or demand or to enforce any remedy under the Agreement or any other agreement, by any waiver or modification in respect of any thereof, by any default, failure or delay, willful or otherwise, in the performance of Company Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of Resources or otherwise operate as a discharge of Resources or the Company as a matter of law or equity. Resources further agrees that its obligations hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Company Obligation is rescinded or must otherwise be restored by the Bank upon the bankruptcy or reorganization of the Company or otherwise. In furtherance of the foregoing and not in limitation of any other right which the Bank may have at law or in equity against Resources by virtue hereof, upon the failure of the Company to pay any Company Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, Resources hereby promises to and will, upon receipt of written demand by the Bank, forthwith pay, or cause to be paid, in cash the amount of such unpaid Company Obligations. Page 2 Until such time as the Company Obligations shall have been paid in full, Resources waives any right of subrogation which it may have in connection with any payment hereunder; provided, however, that upon payment in full of the Company Obligations the Bank shall, in reasonable manner, assign to Resources the amount of such Company Obligations owed to it and so paid, such assignment to be pro tanto to the extent to which the Company Obligations in question was discharged by Resources, or make such disposition thereof as Resources shall direct (all without recourse to the Bank and without any representation or warranty by the Bank). IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to be executed this 8th day of July, 1998. PP&L RESOURCES, INC. By: ____________________________ Senior Vice President-Financial ATTEST: By: ____________________________ Robert J. Grey Secretary ACCEPTED: THE CHASE MANHATTAN BANK By: ____________________________ (Signature and Title) EXHIBIT A PROMISSORY NOTE $80,000,000.00 July 8, 1998 Commitment of Bank PP&L Capital Funding, Inc. (the "Company"), for value received, hereby promises to pay to the order of The Chase Manhattan Bank (the "Bank"), for the account of its appropriate lending office, at its office, 270 Park Avenue, New York, New York 10017, in lawful money of the United States, the principal sum of $80,000,000.00, or, if less, the aggregate unpaid principal amount of all loans made by the Bank to the Company pursuant to the letter agreement dated July 8, 1998, between the Company and the Bank (the "Agreement"), on the dates specified for the repayment of such loans as set forth on the Bank's records or, if not so specified, as provided in the Agreement. Each loan evidenced by this Note shall bear interest, payable as provided in the Agreement. The Bank may, at its option, declare this Note immediately due and payable and terminate its commitment under the Agreement without further formality, if: (a) neither the Company nor Resources pays (x) within 5 business days of the due date thereof any interest or fees on this Note or under the Agreement, or (y) when due, the principal on any loan or any other amount payable hereunder or under the Agreement; (b) any representation or warranty by the Company to the Bank in any financial statement, certificate, or other agreement proves to have been misleading in any material respect when made or deemed to have been made; (c) the Company or Resources, shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any indebtedness in a principal amount in excess of $40,000,000, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument (including any term, covenant, condition or agreement herein, or in the Agreement or in the Guarantee) evidencing or governing any such indebtedness in a principal amount in excess of, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources, $40,000,000 or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such indebtedness or a trustee on its or their Page 2 behalf to cause, such indebtedness to become due prior to its stated maturity; or (d) the Company or Resources ceases to pay its debts or makes an assignment for the benefit of creditors, or any proceeding relating to the Company or Resources under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, is commenced by or against the Company or Resources or the Company or Resources becomes or is adjudicated insolvent or bankrupt, or petitions or applies to any tribunal for any receiver of or any trustee for the Company or Resources or any substantial part of the property of the Company or Resources; (e) the ratio of Consolidated Indebtedness of Resources to Consolidated Capitalization of Resources exceeds 70% at any time and Resources shall have failed to reduce such ratio to 70% or less within 30 days after written notice to Resources from the Bank. For this purpose, "Consolidated Indebtedness of Resources" shall mean the Consolidated Indebtedness of Resources (determined in accordance with United States generally accepted accounting principles (GAAP)), except that for purposes of this definition (1) Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and (2) Consolidated Indebtedness of Resources shall exclude any Hybrid Preferred Securities of Resources. Also for this purpose, Consolidated Capitalization of Resources shall mean the sum of (A) the Consolidated Indebtedness of Resources and (B) (i) the consolidated shareowners' equity (determined in accordance with GAAP) of the common, preference and preferred stockholders of Resources and (ii) the aggregate amount of Hybrid Preferred Securities of Resources, except that for purposes of calculating Consolidated Capitalization of Resources, Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and Consolidated Capitalization of Resources shall exclude that portion of shareowners' equity attributable to assets securing Non-Recourse Indebtedness of Resources. "Hybrid Preferred Securities" of Resources means (1) the preferred securities and subordinated debt described in the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and PP&L, Inc. and the preferred securities and subordinated debt described in the Prospectus dated as of June 9, 1997 of PP&L Capital Trust II and PP&L, Inc. (collectively, the "Existing TOPrS") and (2) any additional preferred securities and subordinated debt (with a maturity of at least twenty years) similar to the Existing TOPrS and in an aggregate amount not to exceed $100,000,000, issued by business trusts, limited liability companies, limited partnerships (or similar entities) (i) all of the common equity, general partner or similar interests of which are owned (either directly or indirectly through one or more wholly-owned Subsidiaries) at all times by Resources or PP&L, Inc., (ii) that have been formed for the purpose of Page 3 issuing hybrid preferred securities and (iii) substantially all the assets of which consist of (A) subordinated debt of Resources or a Subsidiary of Resources, as the case may be, and (B) payments made from time to time on the subordinated debt. "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money, (b) all obligations of such person with respect to deposits or advances of any kind, (c) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien or property owned or acquired by such person, whether or not the obligations secured thereby have been assumed but shall not include any obligations that are without recourse to such person, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of Interest Rate Protection Agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements (the amount of any such obligation to be the amount that would be payable upon the acceleration, termination or liquidation thereof) and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances. "Non- Recourse Indebtedness of Resources" shall mean indebtedness that is nonrecourse to Resources, the Company, PP&L, Inc. ("PP&L") or any of PP&L's Subsidiaries; or (f) the Guarantee of Resources shall, for any reason, cease to be in full force and effect; provided, that upon the happening of any event specified in subparagraph (d) above, this Note and any other obligations of the Company to the Bank shall become immediately due and payable and the commitment under the Agreement shall be terminated without declaration or other notice to the Company. If, for any reason (including acceleration), the principal of any Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any portion thereof, is paid prior to the last day of an interest period therefor, the Company shall reimburse the Bank on demand for any resulting loss or expense incurred by it, including (without limitation) any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. If the Bank reasonably determines at any time that any applicable law, governmental rule or regulation, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency or compliance by the Bank with any regulatory directive subjects the Bank to any tax with respect to this Note or payments by the Company of principal or interest thereunder or hereunder (except for Page 4 taxes on or measured by the net income of the Bank), or will have the effect of increasing the Bank's reserve requirements, deposit requirements, or the amount of capital required or expected to be maintained by the Bank based on the existence of the Facility or the Bank's obligations under the Agreement, then promptly upon receipt of a written demand from the Bank, the Company shall pay the Bank such additional amounts as shall be required to compensate the Bank for the increased cost to the Bank as a result of these increases. Each such written demand shall specify (a) the event pursuant to which the Bank is entitled to claim the additional amount, (b) the date on which the event occurred and became applicable to the Bank and (c) the compensation period for which the amount is due. The period for which the additional amounts may be claimed by the Bank (the "Compensation Period") shall be the number of days actually elapsed since the date the event occurred and became applicable to the Bank. Payments made by the Company to the Bank shall be made on the later of the last day of the Compensation Period specified in each written demand or 30 days after any such written demand. Provided that the Bank acts reasonably and in good faith in determining any additional amounts due, the Bank's determination of compensation owing shall, absent manifest error, be final, conclusive and binding on the Company. If any loan evidenced by this Note becomes due and payable on a Saturday, Sunday or public or other banking holiday under the laws of the State of New York, the maturity thereof shall be extended to the next succeeding business day, and interest shall be payable thereon at the rate herein specified during such extension; provided, however, that if any such extension would result in the interest period for a Eurodollar Loan being carried into another calendar month, such interest period shall end on the preceding business day. If the Bank institutes any action for the enforcement or collection of this Note, the Company shall pay on demand all costs and expenses of such action including reasonable legal fees. If the unpaid principal amount of any Loan, interest accrued thereon or any amount owing by the Company hereunder or under the Agreement shall have become due and payable (by acceleration or otherwise), the Bank shall have the right, in addition to all other rights and remedies available to it, without notice to the Company, to set-off against and to appropriate and apply to such due and payable amounts any debt owing to, and any other funds held in any manner for the account of, the Company by the Bank including, without limitation, all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by the Company with the Bank. Such right shall exist whether or not the Bank shall have given notice or made any demand hereunder, and regardless of the existence or adequacy of any collateral, guarantee or any other security, right or remedy available to the Bank. Nothing herein or in the Agreement shall be deemed a waiver or prohibition of or restriction on the Bank's rights of banker's lien or set-off. PP&L CAPITAL FUNDING, INC. By: ________________________ EX-10.(D) 7 CREDIT AGREEMENT - CITIBANK, N.A. Exhibit 10(d) James E. Abel PP&L, Inc. Treasurer Two North Ninth Street 610.774.5987 Allentown, PA 18101-1179 Fax: 610.774.5106 610.774.5151 E-mail: jeabel@papl.com http://www.papl.com/ July 8, 1998 Mr. Robert J. Harrity Managing Director Citibank, N.A. 399 Park Avenue 4th Floor, Zone 20 New York, NY 10043 Dear Bob: Pursuant to our conversations, Citibank, N.A. (the "Bank") is making available to PP&L Capital Funding, Inc. (the "Company") a line of credit in the aggregate principal amount of $80,000,000.00 (the "Facility"). The Facility will commence on the date hereof and terminate on July 7, 1999 (the "Termination Date"), unless sooner terminated in accordance herewith or with the Note (as hereinafter defined); provided that the Termination Date may be extended from the initial or any extended Termination Date upon written request of the Company to the Bank not more than 45 days nor less than 30 days prior to the Termination Date, and approval of such extension by the Bank. Approval of any such extension shall be in the sole discretion of the Bank. The Bank's approval of such extension shall be provided by written notice to the Company specifying the date to which the Termination Date is extended. Notwithstanding the foregoing, the Termination Date shall in no event be extended to a date that is more than 364 days from the date of such notice. Failure of the Bank to provide written notice of approval of such extension shall be deemed to mean that the Facility is not so extended. Borrowings under this Facility shall become due and payable without setoff, counterclaim or deduction whatsoever on the date selected by the Company in the Request (as hereinafter defined) with respect to each advance, not later than the Termination Date, and will be evidenced by a promissory note in the form of Exhibit A attached hereto (the "Note"). Provided that the aggregate principal amount outstanding at any one time does not exceed $80,000,000.00, borrowings may be effected using either of the following alternatives: 1. Domestic Dollar Loans maturing not later than the Termination Date, bearing an annual interest rate equal to the higher of (i) the Bank's floating prime lending rate (calculated on the basis of a 365-day year) as announced from time to time; and (ii) .5% in excess of the Bank's overnight Federal Funds Rate (calculated on the basis of a 360-day year) which shall mean the per annum rate at which the Bank can acquire federal funds in the interbank overnight federal funds market; this rate (the "Base Rate") to be determined daily; or Page 2 2. Eurodollar Loans with maturities of one, two, or three months (but in no event shall a Eurodollar Loan mature later than the Termination Date), bearing an annual interest rate (calculated on the basis of a 360-day year for the actual number of days elapsed) equal to .30% over the London interbank Offered Rate, as quoted by the Bank, for periods and in amounts corresponding to the terms of such Eurodollar Loans two London business days prior to the date of the requested advance. Interest on each Domestic Dollar Loan and Eurodollar Loan (individually a "Loan" and collectively the "Loans") is due and payable at the maturity thereof or as set out in this Agreement or Note and, if such maturity is longer than one month, at one month intervals after the making of such Loan. Domestic Dollar Loans shall be prepayable at any time without premium or penalty. In the event the Company repays any Eurodollar Loan on any day other than the last day of an interest period therefor (whether by acceleration or otherwise), the Company shall pay to the Bank, on demand, any resulting loss or expense incurred by the Bank including, without limitation, any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. All amounts not paid when due on any Loan (whether by acceleration or otherwise) will bear interest payable on demand at a rate equal to 1% in excess of the Base Rate. The Bank expressly reserves the right to suspend offering Eurodollar Loans if the Bank determines that making or maintaining any such Loan shall have become impracticable or unlawful or if the effective cost thereof to the Bank shall exceed the quoted rate of interest with respect thereto. The Loans will be used for general corporate purposes of the Company. No proceeds will be used to purchase or carry margin stock. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board of Governors of the Federal Reserve System. BORROWING NOTIFICATION AND FUNDING PROVISIONS Minimum drawdowns for all Loans made under this Facility shall be $10,000,000.00. Loans hereunder may be effected by telephone request ("Request") by those individuals authorized to request such Loans as designated in writing to the Bank by the Company's Treasurer. A request for any Loan is deemed as confirmation by the Company that no event as described in paragraph 2 of the Note shall have occurred and be continuing and that all representations and warranties contained in this letter agreement are true as of the date of the borrowing as if made on such date. Upon receipt of such Request, the Bank shall transfer the amount of the Loan in immediately available funds to the Company's Account Number 28065 with Mellon Bank, Delaware, ABA No. 031100047 or such other bank account of the Company as may be directed in writing by the Company's Treasurer. For Domestic Dollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. on the date on which the funds are required. For Eurodollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. at least three business days prior to the date on which the funds are required. LOAN DOCUMENTATION The Bank shall record all borrowings and repayments of principal and interest and the dates of such transactions on its records. The Company agrees that the Bank's records, barring manifest evidence to the contrary, shall conclusively evidence the Company's outstanding obligations under the terms of this letter agreement and Note. Page 3 FACILITY FEE The Company agrees to pay to the Bank a facility fee (the "Fee") of .10% per annum on the aggregate amount of the Facility. This Fee, which shall be based on the actual number of days elapsed on a 360-day year, shall begin to accrue on the date hereof and shall be payable in arrears on the last business day of each calendar quarter and on any date on which the Bank's commitment hereunder shall be terminated in full. All payments made by the Company under this letter agreement or the Note will be made to the Bank at Citibank Global Loan Support Center, 2 Penns Way, Suite 200, New Castle, Delaware 19720 or such other address as the Bank may designate. CANCELLATION The Company, in its sole discretion, may cancel the whole or any part of the unused portion of the Facility in $10,000,000.00 increments by giving the Bank not less than 10 business days prior notice to that effect, specifying the date and amount of the proposed cancellation. ASSIGNABILITY The Bank shall have the right to transfer, assign or grant participations in all or any part of its rights and obligations hereunder. Any assignment pursuant to this clause shall be in the aggregate amount of at least $5,000,000 and shall require the consent of the Company, which consent shall not be unreasonably withheld. In addition to the assignments and participations permitted under the foregoing provisions, the Bank may (without notice to or consent of the Company and without payment of any fee) (i) assign and pledge all or any portion of its Loans and its Notes to the Federal Reserve Bank and (ii) assign all or any portion of its rights under this Agreement and its Loans and its Notes to an affiliate. REPRESENTATIONS AND WARRANTIES The Company is duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to enter into this letter agreement, to execute and deliver the Note and to incur the obligations provided for herein and therein, all of which have been duly authorized by all proper and necessary corporate action. No governmental approval is required in connection with the execution, delivery or performance of this Agreement, Note, or Guarantee. Except as provided by applicable laws of bankruptcy, insolvency, liquidation, or other laws of general application: (i) this letter agreement constitutes, and the Note, when issued and delivered pursuant hereto, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms; (ii) the guarantee constitutes a valid and legally binding obligation of the guarantor enforceable in accordance with its terms; and (iii) the Loans will rank pari passu in respect of priority of payment with all other senior unsecured indebtedness of the Company. The execution, delivery and performance of its obligations under this Agreement and the Note will not violate in any material respect any provisions of any agreement to which the Company is bound and will not be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time) a default under any such agreement or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. Page 4 The audited balance sheet of PP&L Resources, Inc. (Resources), parent corporation of the Company, on a consolidated basis as of December 31, 1997 together with audited statements of income and expense, retained earnings, paid in capital and surplus and changes in financial position, together with notes thereto, for the fiscal year then ended, heretofore delivered to the Bank, fairly present the financial condition of Resources and the results of its operations, as of the date and for the period referred to and have been prepared in accordance with generally accepted accounting principles consistently maintained throughout the period involved. There has been no material adverse change in the business, properties, condition (financial or other) or operations of Resources since the date of such audited financial statements which would adversely affect Resources' ability to meet its obligations under the terms of a Guarantee by Resources of the Company's obligations hereunder of even date ("Guarantee"). The Company has heretofore delivered to the Bank unaudited financial statements, specifically an income statement, balance sheet, and statement of cash flows, for the period ended December 31, 1997. There has been no material adverse change in the business, properties, condition (financial or other) or operations of the Company since the date of the statements which would adversely affect the Company's ability to meet its obligation hereunder. FINANCIAL STATEMENTS As long as the Facility is available to the Company, the Company shall promptly provide the Bank with annual and quarterly financial statements of both the Company and Resources on a consolidated basis. Annual statements shall be supplied within 120 days from the closing of the respective annual fiscal period and Resources' statements shall be audited by a nationally recognized independent accountant. Quarterly financial statements, prepared in accordance with generally accepted principles and practices of accounting, shall be supplied within 60 days of the close of each of the first three quarters of Resources' fiscal year. The Company will provide the Bank with any other information the Bank may reasonably request from time to time. WAIVER OF JURY TRIAL Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any legal proceeding directly or indirectly arising out of or relating to this agreement or the transactions contemplated hereby (whether based on contract, tort or any other theory). Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver; and (b) acknowledges that it and the other parties hereto have been induced to enter into this agreement by, among other things, the mutual waivers and certifications in this section. INDEMNIFICATION The Company agrees to indemnify the Bank and each of its respective affiliates, directors, officers, employees, agents and representatives (each an "Indemnitee") from, and hold each of them harmless against any and all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefore whether or not the Bank is a party thereto) which any Indemnitee may pay or incur arising out of or relating to this Note, the Agreement, or any other agreement executed in connection therewith, the transactions contemplated hereby, or the direct or indirect application or proposed application of the proceeds of any Loan hereunder; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. Page 5 DOCUMENTATION As a condition precedent to the first utilization of the Facility, the Bank shall be in possession of the following: (i) a copy of this letter agreement duly executed by the Company; (ii) a Note of the Company, evidencing loans pursuant to both Domestic Dollar Loans and Eurodollar Loans, in the form of Exhibit A attached hereto and duly executed; (iii) corporate resolutions, articles, and bylaws, and an incumbency/signature certificate of the Company and Resources; (iv) the Guarantee of Resources of the Company's obligations hereunder in the form of Exhibit B attached hereto and duly executed; (v) a Certificate, signed by an officer of the Company, stating that (a) no default or event of default as described in paragraph 2 of the Note has occurred and is continuing as of the date of this letter agreement and Note; (b) all representations and warranties contained in the letter agreement are true and correct as of the date of this letter agreement and Note; and (c) no governmental consents or approvals are required; and (vi) a legal opinion of counsel to the Company and the Guarantor in form and substance reasonably satisfactory to the Bank. Any and all obligations and liabilities incurred under this letter agreement shall be due and payable without setoff, counterclaim or deduction whatsoever on the Termination Date. This letter agreement and the Note shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. All letters, advices, confirmation, notices and other writing required or permitted hereunder shall be sufficient if sent by first class mail, postage prepaid, addressed to the Bank as follows: Citibank, N.A. 399 Park Avenue 4th Floor, Zone 20 New York, NY 10043 Attention: Mr. Robert J. Harrity --------- and to the Company as follows: PP&L Capital Funding, Inc. Two North Ninth Street Allentown, PA 18101 Attention: Mr. James E. Abel --------- Treasurer Page 6 If the above stated terms and conditions are satisfactory, please sign and return to the Company the enclosed copy of this letter agreement. Very truly yours, PP&L CAPITAL FUNDING, INC. By: ______________________________ James E. Abel Treasurer AGREED TO AND ACCEPTED BY: CITIBANK, N.A. By: _________________________ Title: _________________________ GUARANTEE OF PP&L RESOURCES, INC. In order to induce Citibank, N.A. (the "Bank") to extend credit to PP&L Capital Funding, Inc. (the "Company"), under the agreement between the Bank and the Company dated July 8, 1998 (the "Agreement"), PP&L Resources, Inc., (Resources) hereby irrevocably and unconditionally guarantees, as primary obligor and not merely as a surety, the Company's obligations to the Bank under the Agreement and the Note (as defined in the Agreement), whether for principal, interest, fees or otherwise (collectively, the "Company Obligations"). Resources further agrees that the due and punctual payment of Company Obligations may be extended, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its Guarantee hereunder notwithstanding any such extension or renewal of any Company Obligation. Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any legal proceeding directly arising out of or relating to this agreement or the transactions contemplated hereby (whether based on contract, tort or any other theory). Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver; and (b) acknowledges that it and the other parties hereto have been induced to enter into this agreement by, among other things, the mutual waivers and certifications in this section. Resources waives presentment to, demand of payment from and protest to the Company of any of the Company Obligations, and also waives notice of acceptance of its obligations and notice of protest for nonpayment. The obligations of Resources hereunder shall not be affected by (a) the failure of the Bank to assert any claim or demand or to enforce any right or remedy against the Company under the provisions of this Guarantee, the Agreement, the Note or otherwise, (b) change or increase in the amount of any of the Company Obligations, whether or not consented to by Resources, or (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or any other agreement. Resources further agrees that its agreement hereunder constitutes a promise of payment when due (whether or not any bankruptcy or similar proceeding shall have stayed the accrual or collection of any of the Company Obligations or operated as a discharge thereof) and not merely of collection, and waives any right to require that any resort be had by the Bank to any balance of any deposit account or credit on the books of the Bank in favor of any other person. The obligations of Resources hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever, by reason of the invalidity, illegality or unenforceability of the Company Obligations, any impossibility in the performance of the Company Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of Resources hereunder shall not be discharged or impaired or otherwise affected by the failure of the Bank to assert any claim or demand or to enforce any remedy under the Agreement or any other agreement, by any waiver or modification in respect of any thereof, by any default, failure or delay, willful or otherwise, in the performance of Company Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of Resources or otherwise operate as a discharge of Resources or the Company as a matter of law or equity. Page 2 Resources further agrees that its obligations hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Company Obligation is rescinded or must otherwise be restored by the Bank upon the bankruptcy or reorganization of the Company or otherwise. In furtherance of the foregoing and not in limitation of any other right which the Bank may have at law or in equity against Resources by virtue hereof, upon the failure of the Company to pay any Company Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, Resources hereby promises to and will, upon receipt of written demand by the Bank, forthwith pay, or cause to be paid, in cash the amount of such unpaid Company Obligations. Until such time as the Company Obligations shall have been paid in full, Resources waives any right of subrogation which it may have in connection with any payment hereunder; provided, however, that upon payment in full of the Company Obligations the Bank shall, in reasonable manner, assign to Resources the amount of such Company Obligations owed to it and so paid, such assignment to be pro tanto to the extent to which the Company Obligations in question was --- ----- discharged by Resources, or make such disposition thereof as Resources shall direct (all without recourse to the Bank and without any representation or warranty by the Bank). IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to be executed this 8th day of July, 1998. PP&L RESOURCES, INC. By: ____________________________ Senior Vice President-Financial ATTEST: By: ____________________________ Robert J. Grey Secretary ACCEPTED: CITIBANK, N.A. By: ____________________________ (Signature and Title) EXHIBIT A PROMISSORY NOTE $80,000,000.00 July 8, 1998 Commitment of Bank PP&L Capital Funding, Inc. (the "Company"), for value received, hereby promises to pay to the order of Citibank, N.A. (the "Bank"), for the account of its appropriate lending office, at its office, 399 Park Avenue, Fourth Floor, New York, NY 10043, in lawful money of the United States, the principal sum of $80,000,000.00, or, if less, the aggregate unpaid principal amount of all loans made by the Bank to the Company pursuant to the letter agreement dated July 8, 1998, between the Company and the Bank (the "Agreement"), on the dates specified for the repayment of such loans as set forth on the Bank's records or, if not so specified, as provided in the Agreement. Each loan evidenced by this Note shall bear interest, payable as provided in the Agreement. The Bank may, at its option, declare this Note immediately due and payable and terminate its commitment under the Agreement without further formality, if: (a) neither the Company nor Resources pays (x) within 5 business days of the due date thereof any interest or fees on this Note or under the Agreement, or (y) when due, the principal on any loan or any other amount payable hereunder or under the Agreement; (b) any representation or warranty by the Company to the Bank in any financial statement, certificate, or other agreement proves to have been misleading in any material respect when made or deemed to have been made; (c) the Company or PP&L Resources, Inc. ("Resources"), as guarantor under a guarantee (the "Guarantee") dated the date hereof relating to this Note, shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any indebtedness in a principal amount in excess of $40,000,000, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument (including any term, covenant, condition or agreement herein or in the Agreement) evidencing or governing any such indebtedness in a principal amount in excess of, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources, $40,000,000 or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto if the effect of any failure referred to in this clause (ii) is Page 2 to cause, or to permit the holder or holders of such indebtedness or a trustee on its or their behalf to cause such indebtedness to become due prior to its stated maturity; or (d) the Company or Resources ceases to pay its debts or makes an assignment for the benefit of creditors, or any proceeding relating to the Company or Resources under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, is commenced by or against the Company or Resources or the Company or Resources becomes or is adjudicated insolvent or bankrupt, or petitions or applies to any tribunal for any receiver of or any trustee for the Company or Resources or any substantial part of the property of the Company or Resources; (e) the ratio of Consolidated Indebtedness of Resources to Consolidated Capitalization of Resources exceeds 70% at any time and Resources shall have failed to reduce such ratio to 70% or less within 30 days after written notice to Resources from the Bank. For this purpose, "Consolidated Indebtedness of Resources" shall mean the Consolidated Indebtedness of Resources (determined in accordance with United States generally accepted accounting principles (GAAP)), except that for purposes of this definition (1) Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and (2) Consolidated Indebtedness of Resources shall exclude any Hybrid Preferred Securities of Resources. Also for this purpose, Consolidated Capitalization of Resources shall mean the sum of (A) the Consolidated Indebtedness of Resources and (B) (i) the consolidated shareowners' equity (determined in accordance with GAAP) of the common, preference and preferred stockholders of Resources and (ii) the aggregate amount of Hybrid Preferred Securities of Resources, except that for purposes of calculating Consolidated Capitalization of Resources, Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and Consolidated Capitalization of Resources shall exclude that portion of shareowners' equity attributable to assets securing Non-Recourse Indebtedness of Resources. "Hybrid Preferred Securities" of Resources means (1) the preferred securities and subordinated debt described in the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and PP&L, Inc. and the preferred securities and subordinated debt described in the Prospectus dated as of June 9, 1997 of PP&L Capital Trust II and PP&L, Inc. (collectively, the "Existing TOPrS") and (2) any additional preferred securities and subordinated debt (with a maturity of at least twenty years) similar to the Existing TOPrS and in an aggregate amount not to exceed $100,000,000, issued by business trusts, limited liability companies, limited partnerships (or similar entities) (i) all of the common equity, general partner or similar interests of which are owned (either directly or indirectly through one or more wholly-owned Subsidiaries) at all times by Resources or Page 3 PP&L, Inc., (ii) that have been formed for the purpose of issuing hybrid preferred securities and (iii) substantially all the assets of which consist of (A) subordinated debt of Resources or a Subsidiary of Resources, as the case may be, and (B) payments made from time to time on the subordinated debt. "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money, (b) all obligations of such person with respect to deposits or advances of any kind, (c) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien or property owned or acquired by such person, whether or not the obligations secured thereby have been assumed but shall not include any obligations that are without recourse to such person, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of Interest Rate Protection Agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements (the amount of any such obligation to be the amount that would be payable upon the acceleration, termination or liquidation thereof) and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances. "Non-Recourse Indebtedness of Resources" shall mean indebtedness that is nonrecourse to Resources, the Company, PP&L, Inc. ("PP&L") or any of PP&L's Subsidiaries; or (f) the Guarantee of Resources shall, for any reason, cease to be in full force and effect; provided, that upon the happening of any event specified in subparagraph (d) above, this Note and any other obligations of the Company to the Bank shall become immediately due and payable and commitments under the Agreement shall be terminated without declaration or other notice to the Company. Resources or the Company will furnish to the Bank within five days of acquiring knowledge of the existence of a default with respect to the Company or Resources a certificate of a financial officer of Resources and an officer of the Company specifying: (i) the nature of such default, (ii) the period of the existence thereof, and (iii) the actions that Resources and the Company propose to take with respect thereto. Page 4 If, for any reason (including acceleration), the principal of any Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any portion thereof, is paid prior to the last day of an interest period therefor, the Company shall reimburse the Bank on demand for any resulting loss or expense incurred by it including (without limitation) any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. If the Bank reasonably determines at any time that any applicable law, governmental rule or regulation, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency or compliance by the Bank with any regulatory directive subjects the Bank to any tax with respect to this Note or payments by the Company of principal or interest thereunder or hereunder (except for taxes on or measured by the net income of the Bank), or will have the effect of increasing the Bank's reserve requirements, deposit requirements, or the amount of capital required or expected to be maintained by the Bank based on the existence of the Facility or the Bank's obligations under the Agreement, then promptly upon receipt of a written demand from the Bank, the Company shall pay the Bank such additional amounts as shall be required to compensate the Bank for the increased cost to the Bank as a result of these increases. Each such written demand shall specify (a) the event pursuant to which the Bank is entitled to claim the additional amount, (b) the date on which the event occurred and became applicable to the Bank and (c) the compensation period for which the amount is due. The period for which the additional amounts may be claimed by the Bank (the "Compensation Period") shall be the number of days actually elapsed since the date the event occurred and became applicable to the Bank. Payments made by the Company to the Bank shall be made on the later of the last day of the Compensation Period specified in each written demand or 30 days after any such written demand. Provided that the Bank acts reasonably and in good faith in determining any additional amounts due, the Bank's determination of compensation owing shall, absent manifest error, be final, conclusive and binding on the Company. If any loan evidenced by this Note becomes due and payable on a Saturday, Sunday or public or other banking holiday under the laws of the Commonwealth of Pennsylvania, the maturity thereof shall be extended to the next succeeding business day, and interest shall be payable thereon at the rate herein specified during such extension; provided, however, that if any such extension would result in the interest period for a Eurodollar Loan being carried into another calendar month, such interest period shall end on the preceding business day. If the Bank institutes any action for the enforcement or collection of this Note, the Company shall pay on demand all costs and expenses of such action including reasonable legal fees. If the unpaid principal amount of any Loan, interest accrued thereon or any amount owing by the Company hereunder or under the Agreement shall have become due and payable (by acceleration or otherwise), the Bank shall have the right, in addition to all other rights and remedies available to it, without notice to the Company, to set-off against and to appropriate and apply to such due and payable amounts any debt owing to, and any other funds held in any manner for the account of, the Company by the Bank including, without limitation, all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by the Company with the Bank. Such right shall exist whether or not the Bank shall have given notice or made any demand hereunder, and regardless of the existence or adequacy of any collateral, guarantee or any other security, right or remedy available to Page 5 the Bank. Nothing herein or in the Agreement shall be deemed a waiver or prohibition of or restriction on the Bank's rights of banker's lien or set-off. PP&L CAPITAL FUNDING, INC. By: ________________________ EX-10.(E) 8 CREDIT AGREEMENT - FIRST UNION NATIONAL BANK James E. Abel PP&L, Inc. Treasurer Two North Ninth Street 610.774.5987 Allentown, PA 18101-1179 Fax: 610.774.5106 610.774.5151 E-mail: jeabel@papl.com http://www.papl.com/ July 8, 1998 Mr. Michael J. Kolosowsky First Union National Bank One First Union Center 301 South College Street, TW-5 Charlotte, NC 28288-0735 Dear Michael: Pursuant to our conversations, First Union National Bank (the "Bank") is making available to PP&L Capital Funding, Inc. (the "Company") a line of credit in the aggregate principal amount of $80,000,000.00 (the "Facility"). The Facility will commence on the date hereof and terminate on July 7, 1999 (the "Termination Date"), unless sooner terminated in accordance herewith or with the Note (as hereinafter defined); provided that the Termination Date may be extended from the initial or any extended Termination Date upon written request of the Company to the Bank not more than 45 days nor less than 30 days prior to the Termination Date, and approval of such extension by the Bank. Approval of any such extension shall be in the sole discretion of the Bank. The Bank's approval of such extension shall be provided by written notice to the Company specifying the date to which the Termination Date is extended. Notwithstanding the foregoing, the Termination Date shall in no event be extended to a date that is more than 364 days from the date of such notice. Failure of the Bank to provide written notice of approval of such extension shall be deemed to mean that the Facility is not so extended. Borrowings under this Facility shall become due and payable without setoff, counterclaim or deduction whatsoever on the date selected by the Company in the Request (as hereinafter defined) with respect to each advance, not later than the Termination Date, and will be evidenced by a promissory note in the form of Exhibit A attached hereto (the "Note"). Provided that the aggregate principal amount outstanding at any one time does not exceed $80,000,000.00, borrowings may be effected using either of the following alternatives: 1. Domestic Dollar Loans maturing not later than the Termination Date, bearing an annual interest rate equal to the higher of (i) the Bank's floating prime lending rate (calculated on the basis of a 365-day year) as announced from time to time (which rate shall not necessarily be the lowest or best rate offered by the Bank at such time); and (ii) .5% in excess of the Bank's overnight Federal Funds Rate (calculated on the basis of a 360-day year) which shall mean the per annum rate at which the Bank can acquire federal funds in the interbank overnight federal funds market; this rate (the "Base Rate") to be determined daily; or Page 2 2. Eurodollar Loans with maturities of one, two, or three months (but in no event shall a Eurodollar Loan mature later than the Termination Date), bearing an annual interest rate (calculated on the basis of a 360-day year for the actual number of days elapsed) equal to .30% over the London interbank Offered Rate, as determined by the Bank, for periods and in amounts corresponding to the terms of such Eurodollar Loans two London business days prior to the date of the requested advance, such determination to be made by the Bank in its normal and customary manner. Interest on each Domestic Dollar Loan and Eurodollar Loan (individually a "Loan" and collectively the "Loans") is due and payable at the maturity thereof and, if such maturity is longer than one month, at one month intervals after the making of such Loan. Domestic Dollar Loans shall be prepayable at any time without premium or penalty. In the event the Company repays any Eurodollar Loan on any day other than the last day of an interest period therefor (whether by acceleration or otherwise), the Company shall pay to the Bank, on demand, any resulting loss or expense incurred by the Bank including, without limitation, any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. All amounts not paid when due on any Loan (whether by acceleration or otherwise) will bear interest payable on demand at a rate equal to 1% in excess of the Base Rate. The Bank expressly reserves the right to suspend offering Eurodollar Loans if the Bank determines that making or maintaining any such Loan shall have become impracticable or unlawful or if the effective cost thereof to the Bank shall exceed the quoted rate of interest with respect thereto. BORROWING NOTIFICATION AND FUNDING PROVISIONS Minimum drawdowns for all Loans made under this Facility shall be $10,000,000.00 or whole multiples of $1,000,000 in excess thereof. Loans hereunder may be effected by telephone request ("Request") by those individuals authorized to request such Loans as designated in writing to the Bank by the Company's Treasurer. A request for any Loan is deemed as confirmation by the Company that no event as described in paragraph 2 of the Note shall have occurred and be continuing and that all representations and warranties contained in this letter agreement are true as of the date of the borrowing as if made on such date. Upon receipt of such Request or as provided for in the following paragraph, the Bank shall transfer the amount of the Loan in immediately available funds to the Company's Account Number 28065 with Mellon Bank, Delaware, ABA No. 031100047 or such other bank account of the Company as may be directed in writing by the Company's Treasurer. For Domestic Dollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. on the date on which the funds are required. For Eurodollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. at least three business days prior to the date on which the funds are required. LOAN DOCUMENTATION The Bank shall record all borrowings and repayments of principal and interest and the dates of such transactions on its records. The Company agrees that the Bank's records, barring manifest evidence to the contrary, shall conclusively evidence the Company's outstanding obligations under the terms of this letter agreement and Note. FACILITY FEE The Company agrees to pay to the Bank a facility fee (the "Fee") of .10% per annum on the aggregate amount of the Facility. This Fee, which shall be based on the actual Page 3 number of days elapsed on a 360-day year, shall begin to accrue on the date hereof and shall be payable in arrears on the last business day of each calendar quarter and on any date on which the Bank's commitment hereunder shall be terminated in full. All payments made by the Company under this letter agreement or the Note will be made to the Bank at One First Union Center, 5th Floor, 301 South College Street, Charlotte, North Carolina 28288 or such other address as the Bank may designate. CANCELLATION The Company, in its sole discretion, may cancel the whole or any part of the unused portion of the Facility in $10,000,000.00 increments by giving the Bank not less than 10 business days prior notice to that effect, specifying the date and amount of the proposed cancellation. REPRESENTATIONS AND WARRANTIES The Company has full power and authority to enter into this letter agreement, to execute and deliver the Note and to incur the obligations provided for herein and therein, all of which have been duly authorized by all proper and necessary corporate action. Except as provided by applicable laws of bankruptcy, insolvency, liquidation, or other laws of general application: (i) this letter agreement constitutes, and the Note, when issued and delivered pursuant hereto, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms; and (ii) the Loans will rank pari passu in respect of priority of payment with all other senior unsecured indebtedness of the Company. The execution, delivery and performance of its obligations under this Agreement and the Note will not violate in any material respect any provisions of any agreement to which the Company is bound and will not be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time) a default under any such agreement or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. The audited balance sheet of PP&L Resources, Inc. ("Resources"), parent corporation of the Company, on a consolidated basis as of December 31, 1997 together with audited statements of income and expense, retained earnings, paid in capital and surplus and changes in financial position, together with notes thereto, for the fiscal year then ended, heretofore delivered to the Bank, fairly present the financial condition of Resources and its consolidated subsidiaries (including the Company) and the results of their operations, as of the date and for the period referred to and have been prepared in accordance with generally accepted accounting principles consistently maintained throughout the period involved. There has been no material adverse change in the business, properties, condition (financial or other) or operations of Resources or any of its subsidiaries since the date of such audited financial statements which would adversely affect Resources' ability to meet its obligations under the terms of a Guarantee of even date by Resources of the Company's obligations hereunder ("Guarantee"). The Company has heretofore delivered to the Bank unaudited financial statements, specifically an income statement, balance sheet, and statement of cash flows, for the period ended December 31, 1997. There has been no material adverse change in the business, properties, condition (financial or other) or operations of the Company since the date of the statements which would adversely affect the Company's ability to meet its obligations hereunder and under the Note. Page 4 FINANCIAL STATEMENTS As long as the Facility is available to the Company or outstandings exist, the Company shall promptly provide the Bank with annual and quarterly financial statements of both the Company and Resources on a consolidated basis. Annual statements shall be supplied within 120 days from the closing of the respective annual fiscal period and Resources' statements shall be audited by a nationally recognized independent accountant. Quarterly financial statements, prepared in accordance with generally accepted principles and practices of accounting, shall be supplied within 60 days of the close of each of the first three quarters of Resources' fiscal year. The Company will provide the Bank with any other information the Bank may reasonably request from time to time. WAIVER OF JURY TRIAL Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any legal proceeding directly or indirectly arising out of or relating to this agreement or the transactions contemplated hereby (whether based on contract, tort or any other theory). Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver; and (b) acknowledges that it and the other parties hereto have been induced to enter into this agreement by, among other things, the mutual waivers and certifications in this section. INDEMNIFICATION The Company agrees to indemnify the Bank and each of its respective affiliates, directors, officers and employees (each an "Indemnitee") against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefore whether or not the Bank is a party thereto) which any of them may pay or incur arising out of or relating to the letter agreement, the Note, or any other agreement executed in connection therewith, the transactions contemplated hereby, or the direct or indirect application or proposed application of the proceeds of any Loan hereunder; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. DOCUMENTATION As a condition precedent to the first utilization of the Facility, the Bank shall be in possession of the following: (i) a copy of this letter agreement duly executed by the Company; (ii) a Note of the Company, evidencing loans pursuant to both Domestic Dollar Loans and Eurodollar Loans, in the form of Exhibit A attached hereto and duly executed; (iii) corporate resolutions, articles, and bylaws, and an incumbency/signature certificate of the Company and Resources; (iv) the Guarantee of Resources of the Company's obligations hereunder in the form of Exhibit B attached hereto and duly executed; Page 5 (v) a Certificate, signed by an officer of the Company, stating that (a) no default or event of default as described in paragraph 2 of the Note has occurred and is continuing as of the date of this letter agreement and Note; and (b) all representations and warranties contained in the letter agreement are true and correct as of the date of this letter agreement and Note; and (vi) a legal opinion of counsel to the Company and the Guarantor in form and substance reasonably satisfactory to the Bank. Any and all obligations and liabilities incurred under this letter agreement shall be due and payable without setoff, counterclaim or deduction whatsoever on the Termination Date. This letter agreement and the Note shall be governed by and construed in accordance with the laws of the State of North Carolina. All letters, advices, confirmation, notices and other writing required or permitted hereunder shall be sufficient if sent by first class mail, postage prepaid, addressed to the Bank as follows: First Union National Bank One First Union Center 301 South College Street Charlotte, NC 28288-0735 Attention: Mr. Michael J. Kolosowsky --------- Vice President and to the Company as follows: PP&L Capital Funding, Inc. Two North Ninth Street Allentown, PA 18101 Attention: Mr. James E. Abel --------- Treasurer If the above stated terms and conditions are satisfactory, please sign and return to the Company the enclosed copy of this letter agreement. Very truly yours, PP&L CAPITAL FUNDING, INC. By: ______________________________ James E. Abel Treasurer Page 6 AGREED TO AND ACCEPTED BY: FIRST UNION NATIONAL BANK By: _________________________ Title: _________________________ GUARANTEE OF PP&L RESOURCES, INC. In order to induce First Union National Bank (the "Bank") to extend credit to PP&L Capital Funding, Inc. (the "Company"), under the agreement between the Bank and the Company dated July 8, 1998 (the "Agreement"), PP&L Resources, Inc., (Resources) hereby irrevocably and unconditionally guarantees, as primary obligor and not merely as a surety, the Company's obligations to the Bank under the Agreement and the Note (as defined in the Agreement), whether for principal, interest, fees or otherwise (collectively, the "Company Obligations"). Resources further agrees that the due and punctual payment of Company Obligations may be extended, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its Guarantee hereunder notwithstanding any such extension or renewal of any Company Obligation. Resources waives presentment to, demand of payment from and protest to the Company of any of the Company Obligations, and also waives notice of acceptance of its obligations and notice of protest for nonpayment. The obligations of Resources hereunder shall not be affected by (a) the failure of the Bank to assert any claim or demand or to enforce any right or remedy against the Company under the provisions of this Guarantee, the Agreement, the Note or otherwise, (b) change or increase in the amount of any of the Company Obligations, whether or not consented to by Resources, or (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or any other agreement. Resources expressly waives all rights it may now or in the future have under any statute, or at law or in equity, or otherwise, to compel the Bank to proceed in respect of the Company obligations against the Company or any other party or against any security for other guaranty of payment and performance of the Company obligations before proceeding against, or as a condition to proceeding against Resources. Resources further agrees that its agreement hereunder constitutes a promise of payment when due (whether or not any bankruptcy or similar proceeding shall have stayed the accrual or collection of any of the Company Obligations or operated as a discharge thereof) and not merely of collection, and waives any right to require that any resort be had by the Bank to any balance of any deposit account or credit on the books of the Bank in favor of any other person. The obligations of Resources hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever, by reason of the invalidity, illegality or unenforceability of the Company Obligations, any impossibility in the performance of the Company Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of Resources hereunder shall not be discharged or impaired or otherwise affected by the failure of the Bank to assert any claim or demand or to enforce any remedy under the Agreement or any other agreement, by any waiver or modification in respect of any thereof, by any default, failure or delay, willful or otherwise, in the performance of Company Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of Resources or otherwise operate as a discharge of Resources or the Company as a matter of law or equity. Resources further agrees that its obligations hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Company Obligation is rescinded or must otherwise be restored by the Bank upon the bankruptcy or reorganization of the Company or otherwise. In furtherance of the foregoing and not in limitation of any other right which the Bank may have at law or in equity against Resources by virtue hereof, upon the Page 2 failure of the Company to pay any Company Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, Resources hereby promises to and will, upon receipt of written demand by the Bank, forthwith pay, or cause to be paid, in cash the amount of such unpaid Company Obligations. Until such time as the Company Obligations shall have been paid in full, Resources waives any right of subrogation which it may have in connection with any payment hereunder; provided, however, that upon payment in full of the Company Obligations the Bank shall, in reasonable manner, assign to Resources the amount of such Company Obligations owed to it and so paid, such assignment to be pro tanto to the extent to which the Company Obligations in question was --- ----- discharged by Resources, or make such disposition thereof as Resources shall direct (all without recourse to the Bank and without any representation or warranty by the Bank). IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to be executed this 8th day of July, 1998. PP&L RESOURCES, INC. By: ____________________________ Senior Vice President-Financial ATTEST: By: ____________________________ Robert J. Grey Secretary ACCEPTED: FIRST UNION NATIONAL BANK By: ____________________________ (Signature and Title) PROMISSORY NOTE $80,000,000.00 July 8, 1998 Commitment of Bank PP&L Capital Funding, Inc. (the "Company"), for value received, hereby promises to pay to the order of First Union National Bank (the "Bank"), for the account of its appropriate lending office, at its office, One First Union Center, 5th Floor, 301 South College Street, Charlotte, North Carolina 28288, in lawful money of the United States, the principal sum of $80,000,000.00, or, if less, the aggregate unpaid principal amount of all loans made by the Bank to the Company pursuant to the letter agreement dated July 8, 1998, between the Company and the Bank (the "Agreement"), on the dates specified for the repayment of such loans as set forth on the Bank's records or, if not so specified, as provided in the Agreement. Each loan evidenced by this Note shall bear interest, payable as provided in the Agreement. The Bank may, at its option, declare this Note immediately due and payable and terminate its commitment under the Agreement without further formality, if: (a) neither the Company nor PP&L Resources, Inc. ("Resources") pays (x) within 5 business days of the due date thereof any interest or fees on this Note or under the Agreement, or (y) when due, the principal on any loan or any other amount payable hereunder or under the Agreement; (b) any representation or warranty by the Company or Resources to the Bank in any financial statement, certificate, or other agreement proves to have been false or misleading in any material respect when made or deemed to have been made; (c) the Company or Resources, as guarantor under a guarantee (the "Guarantee") dated the date hereof relating to this Note, shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any indebtedness in a principal amount in excess of $40,000,000, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument (including any term, covenant, condition or agreement herein or in the Agreement) evidencing or governing any such indebtedness in a principal amount in excess of, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources, $40,000,000 or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such indebtedness or a trustee on its or their Page 2 behalf to cause, such indebtedness to become due prior to its stated maturity; or (d) the Company or Resources ceases to pay its debts or makes an assignment for the benefit of creditors, or any proceeding relating to the Company or Resources under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, is commenced by or against the Company or Resources or the Company or Resources becomes or is adjudicated insolvent or bankrupt, or petitions or applies to any tribunal for any receiver of or any trustee for the Company or Resources or any substantial part of the property of the Company or Resources; (e) the ratio of Consolidated Indebtedness of Resources to Consolidated Capitalization of Resources exceeds 70% at any time and Resources shall have failed to reduce such ratio to 70% or less within 30 days after written notice to Resources from the Bank. For this purpose, "Consolidated Indebtedness of Resources" shall mean the Consolidated Indebtedness of Resources (determined in accordance with United States generally accepted accounting principles (GAAP)), except that for purposes of this definition (1) Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and (2) Consolidated Indebtedness of Resources shall exclude any Hybrid Preferred Securities of Resources. Also for this purpose, Consolidated Capitalization of Resources shall mean the sum of (A) the Consolidated Indebtedness of Resources and (B) (i) the consolidated shareowners' equity (determined in accordance with GAAP) of the common, preference and preferred stockholders of Resources and (ii) the aggregate amount of Hybrid Preferred Securities of Resources, except that for purposes of calculating Consolidated Capitalization of Resources, Consolidated Indebtedness of Resources shall exclude Non- Recourse Indebtedness of Resources and Consolidated Capitalization of Resources shall exclude that portion of shareowners' equity attributable to assets securing Non-Recourse Indebtedness of Resources. "Hybrid Preferred Securities" of Resources means (1) the preferred securities and subordinated debt described in the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and PP&L, Inc. and the preferred securities and subordinated debt described in the Prospectus dated as of June 9, 1997 of PP&L Capital Trust II and PP&L, Inc. (collectively, the "Existing TOPrS") and (2) any additional preferred securities and subordinated debt (with a maturity of at least twenty years) similar to the Existing TOPrS and in an aggregate amount not to exceed $100,000,000, issued by business trusts, limited liability companies, limited partnerships (or similar entities) (i) all of the common equity, general partner or similar interests of which are owned (either directly or indirectly through one or more wholly-owned Subsidiaries) at all times by Resources or PP&L, Inc., (ii) that have been formed for the purpose of Page 3 issuing hybrid preferred securities and (iii) substantially all the assets of which consist of (A) subordinated debt of Resources or a Subsidiary of Resources, as the case may be, and (B) payments made from time to time on the subordinated debt. "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money, (b) all obligations of such person with respect to deposits or advances of any kind, (c) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien or property owned or acquired by such person, whether or not the obligations secured thereby have been assumed but shall not include any obligations that are without recourse to such person, (g) all Guarantees by such person of Indebtedness of others, (h) all capital lease obligations of such person, (i) all obligations of such person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements (the amount of any such obligation to be the amount that would be payable upon the acceleration, termination or liquidation thereof) and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances. "Non-Recourse Indebtedness of Resources" shall mean indebtedness that is nonrecourse to Resources, the Company, PP&L, Inc. ("PP&L") or any of PP&L's Subsidiaries; or (f) the Guarantee of Resources shall, for any reason, cease to be in full force and effect; provided, that upon the happening of any event specified in subparagraph (d) above, this Note and any other obligations of the Company to the Bank shall become immediately due and payable and commitments under the Agreement shall be terminated without declaration or other notice to the Company. If, for any reason (including acceleration), the principal of any Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any portion thereof, is paid prior to the last day of an interest period therefore, the Company shall reimburse the Bank on demand for any resulting loss or expense incurred by it, including (without limitation) any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. If the Bank reasonably determines at any time that any applicable law, governmental rule or regulation, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency or compliance by the Bank with any regulatory directive subjects the Bank to any tax with respect to this Note or payments by the Company of principal or interest thereunder or hereunder (except for Page 4 taxes on or measured by the net income of the Bank), or will have the effect of increasing the Bank's reserve requirements, deposit requirements, or the amount of capital required or expected to be maintained by the Bank based on the existence of the Facility or the Bank's obligations under the Agreement, then promptly upon receipt of a written demand from the Bank, the Company shall pay the Bank such additional amounts as shall be required to compensate the Bank for the increased cost to the Bank as a result of these increases. Each such written demand shall specify (a) the event pursuant to which the Bank is entitled to claim the additional amount, (b) the date on which the event occurred and became applicable to the Bank and (c) the compensation period for which the amount is due. The period for which the additional amounts may be claimed by the Bank (the "Compensation Period") shall be the number of days actually elapsed since the date the event occurred and became applicable to the Bank. Payments made by the Company to the Bank shall be made on the later of the last day of the Compensation Period specified in each written demand or 30 days after any such written demand. Provided that the Bank acts reasonably and in good faith in determining any additional amounts due, the Bank's determination of compensation owing shall, absent manifest error, be final, conclusive and binding on the Company. If any loan evidenced by this Note becomes due and payable on a Saturday, Sunday or public or other banking holiday under the laws of the State of North Carolina, the maturity thereof shall be extended to the next succeeding business day, and interest shall be payable thereon at the rate herein specified during such extension; provided, however, that if any such extension would result in the interest period for a Eurodollar Loan being carried into another calendar month, such interest period shall end on the preceding business day. If the Bank institutes any action for the enforcement or collection of this Note, the Company shall pay on demand all costs and expenses of such action including reasonable legal fees. If the unpaid principal amount of any Loan, interest accrued thereon or any amount owing by the Company hereunder or under the Agreement shall have become due and payable (by acceleration or otherwise), the Bank shall have the right, in addition to all other rights and remedies available to it, without notice to the Company, to set-off against and to appropriate and apply to such due and payable amounts any debt owing to, and any other funds held in any manner for the account of, the Company by the Bank including, without limitation, all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by the Company with the Bank. Such right shall exist whether or not the Bank shall have given notice or made any demand hereunder, and regardless of the existence or adequacy of any collateral, guarantee or any other security, right or remedy available to the Bank. Nothing herein or in the Agreement shall be deemed a waiver or prohibition of or restriction on the Bank's rights of banker's lien or set-off. Presentment for payment, notice of dishonor, protest and notice of protest are hereby waived. PP&L CAPITAL FUNDING, INC. By: ________________________ EX-10.(F) 9 CREDIT AGREEMENT- MELLON BANK N.A. Exhibit 10(f) James E. Abel PP&L, Inc. Treasurer Two North Ninth Street 610.774.5987 Allentown, PA 18101-1179 Fax: 610.774.5106 610.774.5151 E-mail: jeabel@papl.com http://www.papl.com/ July 8, 1998 Ms. Mary Ellen Usher Vice President Mellon Bank, N.A. One Mellon Bank Center Suite 4425 Pittsburgh, PA 15259-0001 Dear Mary Ellen: Pursuant to our conversations, Mellon Bank, N.A. (the "Bank") is making available to PP&L Capital Funding, Inc. (the "Company") a line of credit in the aggregate principal amount of $80,000,000.00 (the "Facility"). The Facility will commence on the date hereof and terminate on July 7, 1999 (the "Termination Date"), unless sooner terminated in accordance herewith or with the Note (as hereinafter defined); provided that the Termination Date may be extended from the initial or any extended Termination Date upon written request of the Company to the Bank not more than 45 days nor less than 30 days prior to the Termination Date, and approval of such extension by the Bank. Approval of any such extension shall be in the sole discretion of the Bank. The Bank's approval of such extension shall be provided by written notice to the Company specifying the date to which the Termination Date is extended. Notwithstanding the foregoing, the Termination Date shall in no event be extended to a date that is more than 364 days from the date of such notice. Failure of the Bank to provide written notice of approval of such extension shall be deemed to mean that the Facility is not so extended. Borrowings under this Facility shall become due and payable without setoff, counterclaim or deduction whatsoever on the date selected by the Company in the Request (as hereinafter defined) with respect to each advance, not later than the Termination Date, and will be evidenced by a promissory note in the form of Exhibit A attached hereto (the "Note"). Provided that the aggregate principal amount outstanding at any one time does not exceed $80,000,000.00, borrowings may be effected using either of the following alternatives: 1. Domestic Dollar Loans maturing not later than the Termination Date, bearing an annual interest rate equal to the higher of (i) the Bank's floating prime lending rate (calculated on the basis of a 365-day year) as announced from time to time; and (ii) .5% in excess of the Bank's overnight Federal Funds Rate (calculated on the basis of a 360-day year) which shall mean the per annum rate at which the Bank can acquire federal funds in the interbank overnight federal funds market; this rate (the "Base Rate") to be determined daily; or Page 2 2. Eurodollar Loans with maturities of one, two, or three months (but in no event shall a Eurodollar Loan mature later than the Termination Date), bearing an annual interest rate (calculated on the basis of a 360-day year for the actual number of days elapsed) equal to .30% over the London interbank Offered Rate, as quoted by the Bank, for periods and in amounts corresponding to the terms of such Eurodollar Loans two London business days prior to the date of the requested advance. Interest on each Domestic Dollar Loan and Eurodollar Loan (individually a "Loan" and collectively the "Loans") is due and payable at the maturity thereof and, if such maturity is longer than one month, at one month intervals after the making of such Loan. Domestic Dollar Loans shall be prepayable at any time without premium or penalty. In the event the Company repays any Eurodollar Loan on any day other than the last day of an interest period therefor (whether by acceleration or otherwise), the Company shall pay to the Bank, on demand, any resulting loss or expense incurred by the Bank including, without limitation, any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. All amounts not paid when due on any Loan (whether by acceleration or otherwise) will bear interest payable on demand at a rate equal to 1% in excess of the Base Rate. The Bank expressly reserves the right to suspend offering Eurodollar Loans if the Bank determines that making or maintaining any such Loan shall have become impracticable or unlawful or if the effective cost thereof to the Bank shall exceed the quoted rate of interest with respect thereto. BORROWING NOTIFICATION AND FUNDING PROVISIONS Minimum drawdowns for all Loans made under this Facility shall be $10,000,000.00. Loans hereunder may be effected by telephone request ("Request") by those individuals authorized to request such Loans as designated in writing to the Bank by the Company's Treasurer. A request for any Loan is deemed as confirmation by the Company that no event as described in paragraph 2 of the Note shall have occurred and be continuing and that all representations and warranties contained in this letter agreement are true as of the date of the borrowing as if made on such date. Upon receipt of such Request, the Bank shall transfer the amount of the Loan in immediately available funds to the Company's Account Number 28065 with Mellon Bank, Delaware, ABA No. 031100047 or such other bank account of the Company as may be directed in writing by the Company's Treasurer. For Domestic Dollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. on the date on which the funds are required. For Eurodollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. at least three business days prior to the date on which the funds are required. LOAN DOCUMENTATION The Bank shall record all borrowings and repayments of principal and interest and the dates of such transactions on its records. The Company agrees that the Bank's records, barring manifest evidence to the contrary, shall conclusively evidence the Company's outstanding obligations under the terms of this letter agreement and Note. FACILITY FEE The Company agrees to pay to the Bank a facility fee (the "Fee") of .10% per annum on the aggregate amount of the Facility. This Fee, which shall be based on the actual number of days elapsed on a 360-day year, shall begin to accrue on the date hereof and shall be Page 3 payable in arrears on the last business day of each calendar quarter and on any date on which the Bank's commitment hereunder shall be terminated in full. All payments made by the Company under this letter agreement or the Note will be made to the Bank at One Mellon Bank Center, Pittsburgh, PA 15258 or such other address as the Bank may designate. CANCELLATION The Company, in its sole discretion, may cancel the whole or any part of the unused portion of the Facility in $10,000,000.00 increments by giving the Bank not less than 10 business days prior notice to that effect, specifying the date and amount of the proposed cancellation. REPRESENTATIONS AND WARRANTIES The Company has full power and authority to enter into this letter agreement, to execute and deliver the Note and to incur the obligations provided for herein and therein, all of which have been duly authorized by all proper and necessary corporate action. Except as provided by applicable laws of bankruptcy, insolvency, liquidation, or other laws of general application: (i) this letter agreement constitutes, and the Note, when issued and delivered pursuant hereto, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms; and (ii) the Loans will rank pari passu in respect of priority of payment with all other senior unsecured indebtedness of the Company. The execution, delivery and performance of its obligations under this Agreement and the Note will not violate in any material respect any provisions of any agreement to which the Company is bound and will not be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time) a default under any such agreement or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. The audited balance sheet of PP&L Resources, Inc. ("Resources"), parent corporation of the Company, on a consolidated basis as of December 31, 1997 together with audited statements of income and expense, retained earnings, paid in capital and surplus and changes in financial position, together with notes thereto, for the fiscal year then ended, heretofore delivered to the Bank, fairly present the financial condition of Resources and the results of its operations, as of the date and for the period referred to and have been prepared in accordance with generally accepted accounting principles consistently maintained throughout the period involved. There has been no material adverse change in the business, properties, condition (financial or other) or operations of Resources since the date of such audited financial statements which would adversely affect Resources' ability to meet its obligations under the terms of a Guarantee by Resources of the Company's obligations hereunder of even date ("Guarantee"). The Company has heretofore delivered to the Bank unaudited financial statements, specifically an income statement, balance sheet, and statement of cash flows, for the period ended December 31, 1997. There has been no material adverse change in the business, properties, condition (financial or other) or operations of the Company since the date of the statements which would adversely affect the Company's ability to meet its obligation hereunder. Page 4 FINANCIAL STATEMENTS As long as the Facility is available to the Company, the Company shall promptly provide the Bank with annual and quarterly financial statements of both the Company and Resources on a consolidated basis. Annual statements shall be supplied within 120 days from the closing of the respective annual fiscal period and Resources' statements shall be audited by a nationally recognized independent accountant. Quarterly financial statements, prepared in accordance with generally accepted principles and practices of accounting, shall be supplied within 60 days of the close of each of the first three quarters of Resources' fiscal year. The Company will provide the Bank with any other information the Bank may reasonably request from time to time. WAIVER OF JURY TRIAL Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any legal proceeding directly or indirectly arising out of or relating to this agreement or the transactions contemplated hereby (whether based on contract, tort or any other theory). Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver; and (b) acknowledges that it and the other parties hereto have been induced to enter into this agreement by, among other things, the mutual waivers and certifications in this section. INDEMNIFICATION The Company agrees to indemnify the Bank and each of its respective affiliates, directors, officers and employees (each an "Indemnitee") against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefore whether or not the Bank is a party thereto) which any of them may pay or incur arising out of or relating to the Note, this agreement, or any other agreement executed in connection therewith, the transactions contemplated hereby, or the direct or indirect application or proposed application of the proceeds of any Loan hereunder; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. DOCUMENTATION As a condition precedent to the first utilization of the Facility, the Bank shall be in possession of the following: (i) a copy of this letter agreement duly executed by the Company; (ii) a Note of the Company, evidencing loans pursuant to both Domestic Dollar Loans and Eurodollar Loans, in the form of Exhibit A attached hereto and duly executed; (iii) corporate resolutions, articles, and bylaws, and an incumbency/signature certificate of the Company and Resources; (iv) the Guarantee of Resources of the Company's obligations hereunder in the form of Exhibit B attached hereto and duly executed; Page 3 (v) a Certificate, signed by an officer of the Company, stating that (a) no default or event of default as described in paragraph 2 of the Note has occurred and is continuing as of the date of this letter agreement and Note; and (b) all representations and warranties contained in the letter agreement are true and correct as of the date of this letter agreement and Note; and (vi) a legal opinion of counsel to the Company and the Guarantor in form and substance reasonably satisfactory to the Bank. Any and all obligations and liabilities incurred under this letter agreement shall be due and payable without setoff, counterclaim or deduction whatsoever on the Termination Date. This letter agreement and the Note shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. All letters, advices, confirmation, notices and other writing required or permitted hereunder shall be sufficient if sent by first class mail, postage prepaid, addressed to the Bank as follows: Mellon Bank, N.A. One Mellon Bank Center Pittsburgh, PA 15258 and to the Company as follows: PP&L Capital Funding, Inc. Two North Ninth Street Allentown, PA 18101 Attention: Mr. James E. Abel --------- Treasurer If the above stated terms and conditions are satisfactory, please sign and return to the Company the enclosed copy of this letter agreement. Very truly yours, PP&L CAPITAL FUNDING, INC. By: ______________________________ James E. Abel Treasurer AGREED TO AND ACCEPTED BY: MELLON BANK, N.A. By: _________________________ Title: _________________________ GUARANTEE OF PP&L RESOURCES, INC. In order to induce Mellon Bank, N.A. (the "Bank") to extend credit to PP&L Capital Funding, Inc. (the "Company"), under the agreement between the Bank and the Company dated July 8, 1998 (the "Agreement"), PP&L Resources, Inc., (Resources) hereby irrevocably and unconditionally guarantees, as primary obligor and not merely as a surety, the Company's obligations to the Bank under the Agreement and the Note (as defined in the Agreement), whether for principal, interest, fees or otherwise (collectively, the "Company Obligations"). Resources further agrees that the due and punctual payment of Company Obligations may be extended, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its Guarantee hereunder notwithstanding any such extension or renewal of any Company Obligation. Resources waives presentment to, demand of payment from and protest to the Company of any of the Company Obligations, and also waives notice of acceptance of its obligations and notice of protest for nonpayment. The obligations of Resources hereunder shall not be affected by (a) the failure of the Bank to assert any claim or demand or to enforce any right or remedy against the Company under the provisions of this Guarantee, the Agreement, the Note or otherwise, (b) change or increase in the amount of any of the Company Obligations, whether or not consented to by Resources, or (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or any other agreement. Resources further agrees that its agreement hereunder constitutes a promise of payment when due (whether or not any bankruptcy or similar proceeding shall have stayed the accrual or collection of any of the Company Obligations or operated as a discharge thereof) and not merely of collection, and waives any right to require that any resort be had by the Bank to any balance of any deposit account or credit on the books of the Bank in favor of any other person. The obligations of Resources hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever, by reason of the invalidity, illegality or unenforceability of the Company Obligations, any impossibility in the performance of the Company Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of Resources hereunder shall not be discharged or impaired or otherwise affected by the failure of the Bank to assert any claim or demand or to enforce any remedy under the Agreement or any other agreement, by any waiver or modification in respect of any thereof, by any default, failure or delay, willful or otherwise, in the performance of Company Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of Resources or otherwise operate as a discharge of Resources or the Company as a matter of law or equity. Resources further agrees that its obligations hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Company Obligation is rescinded or must otherwise be restored by the Bank upon the bankruptcy or reorganization of the Company or otherwise. In furtherance of the foregoing and not in limitation of any other right which the Bank may have at law or in equity against Resources by virtue hereof, upon the failure of the Company to pay any Company Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, Resources hereby promises to and will, upon receipt of written demand by the Bank, forthwith pay, or cause to be paid, in cash the amount of such unpaid Company Obligation. Page 2 Until such time as the Company Obligations shall have been paid in full, Resources waives any right of subrogation which it may have in connection with any payment hereunder; provided, however, that upon payment in full of the Company Obligations the Bank shall, in reasonable manner, assign to Resources the amount of such Company Obligations owed to it and so paid, such assignment to be pro tanto to the extent to which the Company Obligations in question was --- ----- discharged by Resources, or make such disposition thereof as Resources shall direct (all without recourse to the Bank and without any representation or warranty by the Bank). IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to be executed this 8th day of July, 1998. PP&L RESOURCES, INC. By: ____________________________ Senior Vice President-Financial ATTEST: By: ____________________________ Robert J. Grey Secretary ACCEPTED: MELLON BANK, N.A. By: ____________________________ (Signature and Title) EXHIBIT A PROMISSORY NOTE $80,000,000.00 July 8, 1998 Commitment of Bank PP&L Capital Funding, Inc. (the "Company"), for value received, hereby promises to pay to the order of Mellon Bank, N.A. (the "Bank"), for the account of its appropriate lending office, at its office, One Mellon Bank Center, Pittsburgh, PA 15258, in lawful money of the United States, the principal sum of $80,000,000.00, or, if less, the aggregate unpaid principal amount of all loans made by the Bank to the Company pursuant to the letter agreement dated July 8, 1998, between the Company and the Bank (the "Agreement"), on the dates specified for the repayment of such loans as set forth on the Bank's records or, if not so specified, as provided in the Agreement. Each loan evidenced by this Note shall bear interest, payable as provided in the Agreement. The Bank may, at its option, declare this Note immediately due and payable and terminate its commitment under the Agreement without further formality, if: (a) neither the Company nor Resources pays (x) within 5 business days of the due date thereof any interest or fees on this Note or under the Agreement, or (y) when due, the principal on any loan or any other amount payable hereunder or under the Agreement; (b) any representation or warranty by the Company to the Bank in any financial statement, certificate, or other agreement proves to have been misleading in any material respect when made or deemed to have been made; (c) the Company or PP&L Resources, Inc. ("Resources"), as guarantor under a guarantee (the "Guarantee") dated the date hereof relating to this Note, shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any indebtedness in a principal amount in excess of $40,000,000, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument (including any term, covenant, condition or agreement herein or in the Agreement) evidencing or governing any such indebtedness in a principal amount in excess of, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources, $40,000,000 or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Page 2 indebtedness or a trustee on its or their behalf to cause such indebtedness to become due prior to its stated maturity; or (d) the Company or Resources ceases to pay its debts or makes an assignment for the benefit of creditors, or any proceeding relating to the Company or Resources under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, is commenced by or against the Company or Resources or the Company or Resources becomes or is adjudicated insolvent or bankrupt, or petitions or applies to any tribunal for any receiver of or any trustee for the Company or Resources or any substantial part of the property of the Company or Resources; (e) the ratio of Consolidated Indebtedness of Resources to Consolidated Capitalization of Resources exceeds 70% at any time and Resources shall have failed to reduce such ratio to 70% or less within 30 days after written notice to Resources from the Bank. For this purpose, "Consolidated Indebtedness of Resources" shall mean the Consolidated Indebtedness of Resources (determined in accordance with United States generally accepted accounting principles (GAAP)), except that for purposes of this definition (1) Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and (2) Consolidated Indebtedness of Resources shall exclude any Hybrid Preferred Securities of Resources. Also for this purpose, Consolidated Capitalization of Resources shall mean the sum of (A) the Consolidated Indebtedness of Resources and (B) (i) the consolidated shareowners' equity (determined in accordance with GAAP) of the common, preference and preferred stockholders of Resources and (ii) the aggregate amount of Hybrid Preferred Securities of Resources, except that for purposes of calculating Consolidated Capitalization of Resources, Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and Consolidated Capitalization of Resources shall exclude that portion of shareowners' equity attributable to assets securing Non-Recourse Indebtedness of Resources. "Hybrid Preferred Securities" of Resources means (1) the preferred securities and subordinated debt described in the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and PP&L, Inc. and the preferred securities and subordinated debt described in the Prospectus dated as of June 9, 1997 of PP&L Capital Trust II and PP&L, Inc. (collectively, the "Existing TOPrS") and (2) any additional preferred securities and subordinated debt (with a maturity of at least twenty years) similar to the Existing TOPrS and in an aggregate amount not to exceed $100,000,000, issued by business trusts, limited liability companies, limited partnerships (or similar entities) (i) all of the common equity, general partner or similar interests of which are owned (either directly or indirectly through one or more wholly-owned Subsidiaries) at all times by Resources or PP&L, Inc., (ii) that have been formed for the purpose of Page 3 issuing hybrid preferred securities and (iii) substantially all the assets of which consist of (A) subordinated debt of Resources or a Subsidiary of Resources, as the case may be, and (B) payments made from time to time on the subordinated debt. "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money, (b) all obligations of such person with respect to deposits or advances of any kind, (c) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien or property owned or acquired by such person, whether or not the obligations secured thereby have been assumed but shall not include any obligations that are without recourse to such person, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of Interest Rate Protection Agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements (the amount of any such obligation to be the amount that would be payable upon the acceleration, termination or liquidation thereof) and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances. "Non- Recourse Indebtedness of Resources" shall mean indebtedness that is nonrecourse to Resources, the Company, PP&L, Inc. ("PP&L") or any of PP&L's Subsidiaries; or (f) the Guarantee of Resources shall, for any reason, cease to be in full force and effect; provided, that upon the happening of any event specified in subparagraph (d) above, this Note and any other obligations of the Company to the Bank shall become immediately due and payable and commitments under the Agreement shall be terminated without declaration or other notice to the Company. If, for any reason (including acceleration), the principal of any Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any portion thereof, is paid prior to the last day of an interest period therefor, the Company shall reimburse the Bank on demand for any resulting loss or expense incurred by it including (without limitation) any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. If the Bank reasonably determines at any time that any applicable law, governmental rule or regulation, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency or compliance by the Bank with any regulatory directive subjects the Bank to any tax with respect to this Note or payments by the Company of principal or interest thereunder or hereunder (except for Page 4 taxes on or measured by the net income of the Bank), or will have the effect of increasing the Bank's reserve requirements, deposit requirements, or the amount of capital required or expected to be maintained by the Bank based on the existence of the Facility or the Bank's obligations under the Agreement, then promptly upon receipt of a written demand from the Bank, the Company shall pay the Bank such additional amounts as shall be required to compensate the Bank for the increased cost to the Bank as a result of these increases. Each such written demand shall specify (a) the event pursuant to which the Bank is entitled to claim the additional amount, (b) the date on which the event occurred and became applicable to the Bank and (c) the compensation period for which the amount is due. The period for which the additional amounts may be claimed by the Bank (the "Compensation Period") shall be the number of days actually elapsed since the date the event occurred and became applicable to the Bank. Payments made by the Company to the Bank shall be made on the later of the last day of the Compensation Period specified in each written demand or 30 days after any such written demand. Provided that the Bank acts reasonably and in good faith in determining any additional amounts due, the Bank's determination of compensation owing shall, absent manifest error, be final, conclusive and binding on the Company. If any loan evidenced by this Note becomes due and payable on a Saturday, Sunday or public or other banking holiday under the laws of the Commonwealth of Pennsylvania, the maturity thereof shall be extended to the next succeeding business day, and interest shall be payable thereon at the rate herein specified during such extension; provided, however, that if any such extension would result in the interest period for a Eurodollar Loan being carried into another calendar month, such interest period shall end on the preceding business day. If the Bank institutes any action for the enforcement or collection of this Note, the Company shall pay on demand all costs and expenses of such action including reasonable legal fees. If the unpaid principal amount of any Loan, interest accrued thereon or any amount owing by the Company hereunder or under the Agreement shall have become due and payable (by acceleration or otherwise), the Bank shall have the right, in addition to all other rights and remedies available to it, without notice to the Company, to set-off against and to appropriate and apply to such due and payable amounts any debt owing to, and any other funds held in any manner for the account of, the Company by the Bank including, without limitation, all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by the Company with the Bank. Such right shall exist whether or not the Bank shall have given notice or made any demand hereunder, and regardless of the existence or adequacy of any collateral, guarantee or any other security, right or remedy available to the Bank. Nothing herein or in the Agreement shall be deemed a waiver or prohibition of or restriction on the Bank's rights of banker's lien or set-off. PP&L CAPITAL FUNDING, INC. By: ________________________ EX-10.(G) 10 CREDIT AGREEMENT-MELLON BANK N.A. EXHIBIT 10(g) James E. Abel PP&L, Inc. Treasurer Two North Ninth Street 610.774.5987 Allentown, PA 18101-1179 Fax: 610.774.5106 610.774.5151 E-mail: jeabel@papl.com http://www.papl.com/ July 8, 1998 Ms. Paula Z. Kramp Vice President NationsBank, N.A. 6610 Rockledge Drive 6th Floor Bethesda, MD 20817-1876 Dear Paula: Pursuant to our conversations, NationsBank, (the "Bank") is making available to PP&L Capital Funding, Inc. (the "Company") a line of credit in the aggregate principal amount of $80,000,000.00 (the "Facility"). The Facility will commence on the date hereof and terminate on July 7, 1999 (the "Termination Date"), unless sooner terminated in accordance herewith or with the Note (as hereinafter defined); provided that the Termination Date may be extended from the initial or any extended Termination Date upon written request of the Company to the Bank not more than 45 days nor less than 30 days prior to the Termination Date, and approval of such extension by the Bank. Approval of any such extension shall be in the sole discretion of the Bank. The Bank's approval of such extension shall be provided by written notice to the Company specifying the date to which the Termination Date is extended. Notwithstanding the foregoing, the Termination Date shall in no event be extended to a date that is more than 364 days from the date of such notice. Failure of the Bank to provide written notice of approval of such extension shall be deemed to mean that the Facility is not so extended. Borrowings under this Facility shall become due and payable without setoff, counterclaim or deduction whatsoever on the date selected by the Company in the Request (as hereinafter defined) with respect to each advance, not later than the Termination Date, and will be evidenced by a promissory note in the form of Exhibit A attached hereto (the "Note"). Provided that the aggregate principal amount outstanding at any one time does not exceed $80,000,000.00, borrowings may be effected using either of the following alternatives: 1. Domestic Dollar Loans maturing not later than the Termination Date, bearing an annual interest rate equal to the higher of (i) the Bank's floating prime lending rate (calculated on the basis of a 365-day year) as announced from time to time; and (ii) .5% in excess of the Bank's overnight Federal Funds Rate (calculated on the basis of a 360-day year) which shall mean the per annum rate at which the Bank can acquire federal funds in the interbank overnight federal funds market; this rate (the "Base Rate") to be determined daily; or Page 2 2. Eurodollar Loans with maturities of one, two, or three months (but in no event shall a Eurodollar Loan mature later than the Termination Date), bearing an annual interest rate (calculated on the basis of a 360-day year for the actual number of days elapsed) equal to .30% over the London interbank Offered Rate, as quoted by the Bank, for periods and in amounts corresponding to the terms of such Eurodollar Loans two London business days prior to the date of the requested advance. Interest on each Domestic Dollar Loan and Eurodollar Loan (individually a "Loan" and collectively the "Loans") is due and payable at the maturity thereof and, if such maturity is longer than one month, at one month intervals after the making of such Loan. Domestic Dollar Loans shall be prepayable at any time without premium or penalty. In the event the Company repays any Eurodollar Loan on any day other than the last day of an interest period therefor (whether by acceleration or otherwise), the Company shall pay to the Bank, on demand, any resulting loss or expense incurred by the Bank including, without limitation, any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. All amounts not paid when due on any Loan (whether by acceleration or otherwise) will bear interest payable on demand at a rate equal to 1% in excess of the Base Rate. The Bank expressly reserves the right to suspend offering Eurodollar Loans if the Bank determines that making or maintaining any such Loan shall have become impracticable or unlawful or if the effective cost thereof to the Bank shall exceed the quoted rate of interest with respect thereto. BORROWING NOTIFICATION AND FUNDING PROVISIONS Minimum drawdowns for all Loans made under this Facility shall be $10,000,000.00. Loans hereunder may be effected by telephone request ("Request") by those individuals authorized to request such Loans as designated in writing to the Bank by the Company's Treasurer. A request for any Loan is deemed as confirmation by the Company that no event as described in paragraph 2 of the Note shall have occurred and be continuing and that all representations and warranties contained in this letter agreement are true as of the date of the borrowing as if made on such date. Upon receipt of such Request, the Bank shall transfer the amount of the Loan in immediately available funds to the Company's Account Number 28065 with Mellon Bank, Delaware, ABA No. 031100047 or such other bank account of the Company as may be directed in writing by the Company's Treasurer. For Domestic Dollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. on the date on which the funds are required. For Eurodollar Loans, the Company may initiate a Loan by providing a Request prior to 11:00 A.M. at least three business days prior to the date on which the funds are required. LOAN DOCUMENTATION The Bank shall record all borrowings and repayments of principal and interest and the dates of such transactions on its records. The Company agrees that the Bank's records, barring manifest evidence to the contrary, shall conclusively evidence the Company's outstanding obligations under the terms of this letter agreement and Note. Page 3 FACILITY FEE The Company agrees to pay to the Bank a facility fee (the "Fee") of .10% per annum on the aggregate amount of the Facility. This Fee, which shall be based on the actual number of days elapsed on a 360-day year, shall begin to accrue on the date hereof and shall be payable in arrears on the last business day of each calendar quarter and on any date on which the Bank's commitment hereunder shall be terminated in full. All payments made by the Company under this letter agreement or the Note will be made to the Bank at 6610 Rockledge Drive, 6th Floor, Bethesda, Maryland 20817-1876 or such other address as the Bank may designate. CANCELLATION The Company, in its sole discretion, may cancel the whole or any part of the unused portion of the Facility in $10,000,000.00 increments by giving the Bank not less than 10 business days prior notice to that effect, specifying the date and amount of the proposed cancellation. REPRESENTATIONS AND WARRANTIES The Company has full power and authority to enter into this letter agreement, to execute and deliver the Note and to incur the obligations provided for herein and therein, all of which have been duly authorized by all proper and necessary corporate action. Except as provided by applicable laws of bankruptcy, insolvency, liquidation, or other laws of general application: (i) this letter agreement constitutes, and the Note, when issued and delivered pursuant hereto, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms; and (ii) the Loans will rank pari passu in respect of priority of payment with all other senior unsecured indebtedness of the Company. The execution, delivery and performance of its obligations under this Agreement and the Note will not violate in any material respect any provisions of any agreement to which the Company is bound and will not be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time) a default under any such agreement or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. The audited balance sheet of PP&L Resources, Inc. ("Resources"), parent corporation of the Company, on a consolidated basis as of December 31, 1997 together with audited statements of income and expense, retained earnings, paid in capital and surplus and changes in financial position, together with notes thereto, for the fiscal year then ended, heretofore delivered to the Bank, fairly present the financial condition of Resources and the results of its operations, as of the date and for the period referred to and have been prepared in accordance with generally accepted accounting principles consistently maintained throughout the period involved. There has been no material adverse change in the business, properties, condition (financial or other) or operations of Resources since the date of such audited financial statements which would adversely affect Resources' ability to meet its obligations under the terms of a Guarantee by Resources of the Company's obligations hereunder of even date ("Guarantee"). The Company has heretofore delivered to the Bank unaudited financial statements, specifically an income statement, balance sheet, and statement of cash flows, for the period ended December 31, 1997. There has been no material adverse change in the business, properties, condition (financial or other) or operations of the Company since the date of the statements which would adversely affect the Company's ability to meet its obligation hereunder. FINANCIAL STATEMENTS As long as the Facility is available to the Company, the Company shall promptly provide the Bank with annual and quarterly financial statements of both the Company and Resources on a consolidated basis. Annual statements shall be supplied within 120 days from the closing of the respective annual fiscal period and Resources' statements shall be audited by a nationally recognized independent accountant. Quarterly financial statements, prepared in accordance with generally accepted principles and practices of accounting, shall be supplied within 60 days of the close of each of the first three quarters of Resources' fiscal year. The Company will provide the Bank with any other information the Bank may reasonably request from time to time. WAIVER OF JURY TRIAL Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any legal proceeding directly or indirectly arising out of or relating to this agreement or the transactions contemplated hereby (whether based on contract, tort or any other theory). Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver; and (b) acknowledges that it and the other parties hereto have been induced to enter into this agreement by, among other things, the mutual waivers and certifications in this section. INDEMNIFICATION The Company agrees to indemnify the Bank and each of its respective affiliates, directors, officers and employees (each an "Indemnitee") against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefore whether or not the Bank is a party thereto) which any of them may pay or incur arising out of or relating to the Note, this agreement, or any other agreement executed in connection therewith, the transactions contemplated hereby, or the direct or indirect application or proposed application of the proceeds of any Loan hereunder; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. DOCUMENTATION As a condition precedent to the first utilization of the Facility, the Bank shall be in possession of the following: (i) a copy of this letter agreement duly executed by the Company; (ii) a Note of the Company, evidencing loans pursuant to both Domestic Dollar Loans and Eurodollar Loans, in the form of Exhibit A attached hereto and duly executed; Page 5 (iii) corporate resolutions, articles, and bylaws, and an incumbency/signature certificate of the Company and Resources; (iv) the Guarantee of Resources of the Company's obligations hereunder in the form of Exhibit B attached hereto and duly executed; (v) a Certificate, signed by an officer of the Company, stating that (a) no default or event of default as described in paragraph 2 of the Note has occurred and is continuing as of the date of this letter agreement and Note; and (b) all representations and warranties contained in the letter agreement are true and correct as of the date of this letter agreement and Note; and (vi) a legal opinion of counsel to the Company and the Guarantor in form and substance reasonably satisfactory to the Bank. Any and all obligations and liabilities incurred under this letter agreement shall be due and payable without setoff, counterclaim or deduction whatsoever on the Termination Date. This letter agreement and the Note shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. All letters, advices, confirmation, notices and other writing required or permitted hereunder shall be sufficient if sent by first class mail, postage prepaid, addressed to the Bank as follows: NationsBank, N.A. 6610 Rockledge Drive 6th Floor Bethesda, MD 20817-1876 and to the Company as follows: PP&L Capital Funding, Inc. Two North Ninth Street Allentown, PA 18101 Attention: Mr. James E. Abel --------- Treasurer If the above stated terms and conditions are satisfactory, please sign and return to the Company the enclosed copy of this letter agreement. Very truly yours, PP&L CAPITAL FUNDING, INC. By: ______________________________ James E. Abel Treasurer Page 6 AGREED TO AND ACCEPTED BY: NATIONSBANK, N.A. By: _________________________ Title: _________________________ GUARANTEE OF PP&L RESOURCES, INC. In order to induce NationsBank (the "Bank") to extend credit to PP&L Capital Funding, Inc. (the "Company"), under the agreement between the Bank and the Company dated July 8, 1998 (the "Agreement"), PP&L Resources, Inc., (Resources) hereby irrevocably and unconditionally guarantees, as primary obligor and not merely as a surety, the Company's obligations to the Bank under the Agreement and the Note (as defined in the Agreement), whether for principal, interest, fees or otherwise (collectively, the "Company Obligations"). Resources further agrees that the due and punctual payment of Company Obligations may be extended, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its Guarantee hereunder notwithstanding any such extension or renewal of any Company Obligation. Resources waives presentment to, demand of payment from and protest to the Company of any of the Company Obligations, and also waives notice of acceptance of its obligations and notice of protest for nonpayment. The obligations of Resources hereunder shall not be affected by (a) the failure of the Bank to assert any claim or demand or to enforce any right or remedy against the Company under the provisions of this Guarantee, the Agreement, the Note or otherwise, (b) change or increase in the amount of any of the Company Obligations, whether or not consented to by Resources, or (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or any other agreement. Resources further agrees that its agreement hereunder constitutes a promise of payment when due (whether or not any bankruptcy or similar proceeding shall have stayed the accrual or collection of any of the Company Obligations or operated as a discharge thereof) and not merely of collection, and waives any right to require that any resort be had by the Bank to any balance of any deposit account or credit on the books of the Bank in favor of any other person. The obligations of Resources hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever, by reason of the invalidity, illegality or unenforceability of the Company Obligations, any impossibility in the performance of the Company Obligations, any transfer of the Company obligations or otherwise. Without limiting the generality of the foregoing, the obligations of Resources hereunder shall not be discharged or impaired or otherwise affected by the failure of the Bank to assert any claim or demand or to enforce any remedy under the Agreement or any other agreement, by any waiver or modification in respect of any thereof, by any default, failure or delay, willful or otherwise, in the performance of Company Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of Resources or otherwise operate as a discharge of Resources or the Company as a matter of law or equity. Resources further agrees that its obligations hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Company Obligation is rescinded or must otherwise be restored by the Bank upon the bankruptcy or reorganization of the Company or otherwise. In furtherance of the foregoing and not in limitation of any other right which the Bank may have at law or in equity against Resources by virtue hereof, upon the failure of the Company to pay any Company Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, Resources hereby promises to and will, upon receipt of written demand by the Bank, forthwith pay, or cause to be paid, in cash the amount of such unpaid Company Obligation. Page 2 Until such time as the Company Obligations shall have been paid in full and the commitment of the Bank with respect thereto terminated, Resources waives any right of subrogation which it may have in connection with any payment hereunder; provided, however, that upon payment in full of the Company Obligations and the termination of the Bank's commitment with respect thereto, the Bank shall, in reasonable manner, assign to Resources the amount of such Company Obligations owed to it and so paid, such assignment to be pro tanto to --- ----- the extent to which the Company Obligations in question was discharged by Resources, or make such disposition thereof as Resources shall direct (all without recourse to the Bank and without any representation or warranty by the Bank). IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to be executed this 8th day of July, 1998. PP&L RESOURCES, INC. By: --------------------------------- Senior Vice President-Financial ATTEST: By: ---------------------------- Robert J. Grey Secretary ACCEPTED: NATIONSBANK, N.A. By: - ---------------------------- (Signature and Title) EXHIBIT A PROMISSORY NOTE $80,000,000.00 July 8, 1998 Commitment of Bank PP&L Capital Funding, Inc. (the "Company"), for value received, hereby promises to pay to the order of NationsBank (the "Bank"), for the account of its appropriate lending office, at its office, 6610 Rockledge Drive, 6th Floor, Bethesda, Maryland 20817-1876, in lawful money of the United States, the principal sum of $80,000,000.00, or, if less, the aggregate unpaid principal amount of all loans made by the Bank to the Company pursuant to the letter agreement dated July 8, 1998, between the Company and the Bank (the "Agreement"), on the dates specified for the repayment of such loans as set forth on the Bank's records or, if not so specified, as provided in the Agreement. Each loan evidenced by this Note shall bear interest, payable as provided in the Agreement. The Bank may, at its option, declare this Note immediately due and payable and terminate its commitment under the Agreement without further formality, if: (a) neither the Company nor Resources pays (x) within 5 business days of the due date thereof any interest or fees on this Note or under the Agreement, or (y) when due, the principal on any loan or any other amount payable hereunder or under the Agreement; (b) any representation or warranty by the Company to the Bank in any financial statement, certificate, or other agreement proves to have been misleading in any material respect when made or deemed to have been made; (c) the Company or PP&L Resources, Inc. ("Resources"), as guarantor under a guarantee (the "Guarantee") dated the date hereof relating to this Note, shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any indebtedness in a principal amount in excess of $40,000,000, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument (including any term, covenant, condition or agreement herein or in the Agreement) evidencing or governing any such indebtedness in a principal amount in excess of, in the case of indebtedness of Resources or indebtedness of the Company guaranteed by Resources, $40,000,000 or, in the case of indebtedness of the Company not guaranteed by Resources, $10,000,000, if such failure shall continue beyond any period of grace provided with respect thereto if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such indebtedness or a trustee on its or their behalf to cause, such indebtedness to become due prior to its stated maturity; or (d) the Company or Resources ceases to pay its debts or makes an assignment for the benefit of creditors, or any proceeding relating to the Company or Resources under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, is commenced by or against the Company or Resources or the Company or Resources becomes or is adjudicated insolvent or bankrupt, or petitions or applies to any tribunal for any receiver of or any trustee for the Company or Resources or any substantial part of the property of the Company or Resources; (e) the ratio of Consolidated Indebtedness of Resources to Consolidated Capitalization of Resources exceeds 70% at any time and Resources shall have failed to reduce such ratio to 70% or less within 30 days after written notice to Resources from the Bank. For this purpose, "Consolidated Indebtedness of Resources" shall mean the Consolidated Indebtedness of Resources (determined in accordance with United States generally accepted accounting principles (GAAP)), except that for purposes of this definition (1) Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and (2) Consolidated Indebtedness of Resources shall exclude any Hybrid Preferred Securities of Resources. Also for this purpose, Consolidated Capitalization of Resources shall mean the sum of (A) the Consolidated Indebtedness of Resources and (B) (i) the consolidated shareowners' equity (determined in accordance with GAAP) of the common, preference and preferred stockholders of Resources and (ii) the aggregate amount of Hybrid Preferred Securities of Resources, except that for purposes of calculating Consolidated Capitalization of Resources, Consolidated Indebtedness of Resources shall exclude Non-Recourse Indebtedness of Resources and Consolidated Capitalization of Resources shall exclude that portion of shareowners' equity attributable to assets securing Non-Recourse Indebtedness of Resources. "Hybrid Preferred Securities" of Resources means (1) the preferred securities and subordinated debt described in the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and PP&L, Inc. and the preferred securities and subordinated debt described in the Prospectus dated as of June 9, 1997 of PP&L Capital Trust II and PP&L, Inc. (collectively, the "Existing TOPrS") and (2) any additional preferred securities and subordinated debt (with a maturity of at least twenty years) similar to the Existing TOPrS and in an aggregate amount not to exceed $100,000,000, issued by business trusts, limited liability companies, limited partnerships (or similar entities) (i) all of the common equity, general partner or similar interests of which are owned (either directly or indirectly through one or more wholly-owned Subsidiaries) at all times by Resources or Page 3 PP&L, Inc., (ii) that have been formed for the purpose of issuing hybrid preferred securities and (iii) substantially all the assets of which consist of (A) subordinated debt of Resources or a Subsidiary of Resources, as the case may be, and (B) payments made from time to time on the subordinated debt. "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money, (b) all obligations of such person with respect to deposits or advances of any kind, (c) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien or property owned or acquired by such person, whether or not the obligations secured thereby have been assumed but shall not include any obligations that are without recourse to such person, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of Interest Rate Protection Agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements (the amount of any such obligation to be the amount that would be payable upon the acceleration, termination or liquidation thereof) and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances. "Non-Recourse Indebtedness of Resources" shall mean indebtedness that is nonrecourse to Resources, the Company, PP&L, Inc. ("PP&L") or any of PP&L's Subsidiaries; or (f) the Guarantee of Resources shall, for any reason, cease to be in full force and effect; provided, that upon the happening of any event specified in subparagraph (d) above, this Note and any other obligations of the Company to the Bank shall become immediately due and payable and commitments under the Agreement shall be terminated without declaration or other notice to the Company. If, for any reason (including acceleration), the principal of any Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any portion thereof, is paid prior to the last day of an interest period therefor, the Company shall reimburse the Bank on demand for any resulting loss or expense incurred by it, including (without limitation) any loss or expense incurred in obtaining, liquidating or employing deposits from third parties. If the Bank reasonably determines at any time that any applicable law, governmental rule or regulation, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency or compliance by the Bank with any regulatory directive subjects the Bank to any tax with respect to this Note or payments by the Company of principal or interest thereunder or hereunder (except for taxes on or measured by the net income of the Bank), or will have the effect of increasing the Bank's reserve requirements, deposit requirements, or the amount of capital required or expected to be maintained by the Bank based on the existence of the Facility or the Bank's obligations under the Agreement, then promptly upon receipt of a written demand from the Bank, the Company shall pay the Bank such additional amounts as shall be required to compensate the Bank for the increased cost to the Bank as a result of these increases. Each such written demand shall specify (a) the event pursuant to which the Bank is entitled to claim the additional amount, (b) the date on which the event occurred and became applicable to the Bank and (c) the compensation period for which the amount is due. The period for which the additional amounts may be claimed by the Bank (the "Compensation Period") shall be the number of days actually elapsed since the date the event occurred and became applicable to the Bank. Payments made by the Company to the Bank shall be made on the later of the last day of the Compensation Period specified in each written demand or 30 days after any such written demand. Provided that the Bank acts reasonably and in good faith in determining any additional amounts due, the Bank's determination of compensation owing shall, absent manifest error, be final, conclusive and binding on the Company. If any loan evidenced by this Note becomes due and payable on a Saturday, Sunday or public or other banking holiday under the laws of the Commonwealth of Pennsylvania, the maturity thereof shall be extended to the next succeeding business day, and interest shall be payable thereon at the rate herein specified during such extension; provided, however, that if any such extension would result in the interest period for a Eurodollar Loan being carried into another calendar month, such interest period shall end on the preceding business day. If the Bank institutes any action for the enforcement or collection of this Note, the Company shall pay on demand all costs and expenses of such action including reasonable legal fees. If the unpaid principal amount of any Loan, interest accrued thereon or any amount owing by the Company hereunder or under the Agreement shall have become due and payable (by acceleration or otherwise), the Bank shall have the right, in addition to all other rights and remedies available to it, without notice to the Company, to set-off against and to appropriate and apply to such due and payable amounts any debt owing to, and any other funds held in any manner for the account of, the Company by the Bank including, without limitation, all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by the Company with the Bank. Such right shall exist whether or not the Bank shall have given notice or made any demand hereunder, and regardless of the existence or adequacy of any collateral, guarantee or any other security, right or remedy available to the Bank. Nothing herein or in the Agreement shall be deemed a waiver or prohibition of or restriction on the Bank's rights of banker's lien or set-off. PP&L CAPITAL FUNDING, INC. By: ________________________ EX-10.(I) 11 AMENDED AND RESTATED OPERATING AGREEMENT Exhibit 10(i) ================================================================================ AMENDED AND RESTATED OPERATING AGREEMENT OF PJM INTERCONNECTION, L.L.C. DATED JUNE 2, 1997 (REVISED DECEMBER 31, 1997, JANUARY 26, 1998, JANUARY 30, 1998, MARCH 17, 1998, MAY 15, 1998, JUNE 26, 1998, SEPTEMBER 24, 1998, OCTOBER 14, 1998, OCTOBER 15, 1998) ================================================================================ OPERATING AGREEMENT - -------------------------------------------------------------------------------- TABLE OF CONTENTS 1. DEFINITIONS 1.1 Act.............................................................. 2 1.2 Affiliate........................................................ 2 1.3 Agreement........................................................ 2 1.4 Annual Meeting of the Members.................................... 2 1.5 Board Member..................................................... 2 1.6 Capacity Resource................................................ 2 1.7 Control Area..................................................... 2 1.8 Electric Distributor............................................. 3 1.9 Effective Date................................................... 3 1.10 Emergency....................................................... 3 1.11 End-Use Customer................................................ 3 1.12 FERC............................................................ 3 1.13 Finance Committee............................................... 4 1.14 Generation Owner................................................ 4 1.15 Good Utility Practice........................................... 4 1.16 Interconnection................................................. 4 1.17 LLC............................................................. 4 1.18 Load Serving Entity............................................. 4 1.19 Locational Marginal Price....................................... 4 1.20 MAAC............................................................ 4 1.21 Market Buyer.................................................... 5 1.22 Market Participant.............................................. 5 1.23 Market Seller................................................... 5 1.24 Member.......................................................... 5 1.25 Members Committee............................................... 5 1.26 NERC............................................................ 5 1.27 Office of the Interconnection................................... 5 1.28 Operating Reserve............................................... 5 1.29 Original PJM Agreement.......................................... 5 1.30 Other Supplier.................................................. 6 1.31 PJM Board....................................................... 6 1.32 PJM Control Area................................................ 6 1.33 PJM Dispute Resolution Procedures............................... 6 1.34 PJM Interchange Energy Market................................... 6 1.35 PJM Manuals..................................................... 6 1.36 PJM Tariff...................................................... 6 1.37 Planning Period................................................. 6 1.38 President....................................................... 6 1.39 Related Parties................................................. 7 i 1.40 Reliability Assurance Agreement................................. 7 1.41 Sector Votes.................................................... 7 1.42 State........................................................... 7 1.43 System.......................................................... 7 1.44 Transmission Facilities......................................... 7 1.45 Transmission Owner.............................................. 7 1.46 Transmission Owners Agreement................................... 8 1.47 User Group...................................................... 8 1.48 Voting Member................................................... 8 1.49 Weighted Interest............................................... 8 2. FORMATION, NAME; PLACE OF BUSINESS..................................... 8 2.1 Formation of LLC; Certificate of Formation....................... 8 2.2 Name of LLC...................................................... 9 2.3 Place of Business................................................ 9 2.4 Registered Office and Registered Agent........................... 9 3. PURPOSES AND POWERS OF LLC............................................. 9 3.1 Purposes......................................................... 9 3.2 Powers...........................................................10 4. EFFECTIVE DATE AND TERMINATION.........................................10 4.1 Effective Date and Termination...................................10 4.2 Governing Law....................................................10 5. WORKING CAPITAL AND CAPITAL CONTRIBUTIONS..............................11 5.1 Funding of Working Capital and Capital Contributions.............11 5.2 Contributions to Association.....................................11 6. TAX STATUS AND DISTRIBUTIONS...........................................11 6.1 Tax Status.......................................................11 6.2 Return of Capital Contributions..................................12 6.3 Liquidating Distribution.........................................12 7. PJM BOARD..............................................................12 7.1 Composition......................................................12 7.2 Qualifications...................................................13 7.3 Term of Office...................................................13 7.4 Quorum...........................................................13 7.5 Operating and Capital Budgets....................................14 7.5.1 Finance Committee..........................................14 7.5.2 Adoption of Budgets........................................14 7.6 By-laws..........................................................14 7.7 Duties and Responsibilities of the PJM Board.....................14 8. MEMBERS COMMITTEE......................................................16 8.1 Sectors..........................................................16 8.1.1 Designation................................................16 8.1.2 Related Parties............................................17 8.2 Representatives..................................................17 8.2.1 Appointment................................................17 8.2.2 Regulatory Authorities.....................................17 8.2.3 Initial Representatives....................................17 8.2.4 Change of or Substitution for a Representative.............17 ii 8.3 Meetings.........................................................18 8.3.1 Regular and Special Meetings...............................18 8.3.2 Attendance.................................................18 8.3.3 Quorum.....................................................18 8.4 Manner of Acting.................................................18 8.5 Chair and Vice Chair of the Members Committee....................19 8.5.1 Selection and Term.........................................19 8.5.2 Duties.....................................................19 8.6 Other Committees.................................................19 8.7 User Groups......................................................20 8.8 Powers of the Members Committee..................................20 9. OFFICERS...............................................................21 9.1 Election and Term................................................21 9.2 President........................................................21 9.3 Secretary........................................................21 9.4 Treasurer........................................................22 9.5 Renewal of Officers; Vacancies...................................22 9.6 Compensation.....................................................22 10. OFFICE OF THE INTERCONNECTION.........................................22 10.1 Establishment...............................................22 10.2 Processes and Organization..................................23 10.3 Confidential Information....................................23 10.4 Duties and Responsibilities.................................23 11. MEMBERS...............................................................25 11.1 Management Rights...............................................25 11.2 Other Activities................................................25 11.3 Member Responsibilities.........................................25 11.3.1 General...................................................25 11.3.2 Facilities Planning and Operation.........................26 11.3.3 Electric Distributors.....................................27 11.3.4 Reports to the Office of the Interconnection..............28 11.4 Regional Transmission Expansion Planning Protocol...............28 11.5 Member Right to Petition........................................28 11.6 Membership Requirements.........................................29 12. TRANSFERS OF MEMBERSHIP INTEREST......................................30 13. INTERCHANGE...........................................................30 13.1 Interchange Arrangements with Non-Members.......................30 13.2 Energy Market...................................................30 14. METERING..............................................................30 14.1 Installation, Maintenance and Reading of Meters.................30 14.2 Metering Procedures.............................................30 14.3 Integrated Megawatt-Hours.......................................31 14.4 Meter Locations.................................................31 15. ENFORCEMENT OF OBLIGATIONS............................................31 15.1 Failure to Meet Obligations.....................................31 15.1.1 Termination of Market Buyer Rights........................31 15.1.2 Termination of Market Seller Rights.......................31 iii 15.1.3 Payment of Bills..........................................32 15.2 Enforcement of Obligations......................................33 15.3 Obligations to a Member in Default..............................33 15.4 Obligations of a Member in Default..............................33 15.5 No Implied Waiver...............................................33 16. LIABILITY AND INDEMNITY...............................................34 16.1 Members.........................................................34 16.2 LLC Indemnified Parties.........................................35 16.3 Worker' Compensation Claims.....................................36 16.4 Limitation of Liability.........................................36 16.5 Resolution of Disputes..........................................36 16.6 Gross Negligence or Willful Misconduct..........................36 16.7 Insurance.......................................................36 17. MEMBER REPRESENTATIONS, WARRANTIES AND COVENANTS......................37 17.1 Representations and Warranties..................................37 17.1.1 Organization and Existence................................37 17.1.2 Power and Authority.......................................37 17.1.3 Authorization and Enforceability..........................37 17.1.4 No Government Consents....................................37 17.1.5 No Conflict or Breach.....................................37 17.1.6 No Proceedings............................................38 17.2 Municipal Electric Systems......................................38 17.3 Survival........................................................38 18. MISCELLANEOUS PROVISIONS..............................................38 18.1 [Reserved]......................................................38 18.2 Fiscal and Taxable Year.........................................38 18.3 Reports.........................................................38 18.4 Bank Accounts; Checks, Notes and Drafts.........................39 18.5 Books and Records...............................................39 18.6 Amendment.......................................................40 18.7 Interpretation..................................................40 18.8 Severability....................................................40 18.9 Force Majeure...................................................41 18.10 Further Assurances.............................................41 18.11 Seal...........................................................41 18.12 Counterparts...................................................41 18.13 Costs of Meetings..............................................41 18.14 Notice.........................................................42 18.15 Headings.......................................................42 18.16 No Third-Party Beneficiaries...................................42 18.17 Confidentiality................................................42 18.17.1 Party Access.............................................42 18.17.2 Required Disclosure......................................43 18.18 Termination and Withdrawal.....................................43 18.18.1 Termination..................................................43 18.18.2 Withdrawal...................................................43 18.18.3 Winding Up...................................................44 iv SCHEDULE 1 - PJM INTERCHANGE ENERGY MARKET................................ 1 1. MARKET OPERATIONS...................................................... 1 1.1 Introduction..................................................... 1 1.2 Cost-based Offers................................................ 1 1.3 Definitions...................................................... 1 1.3.1 Dispatch Rate.............................................. 1 1.3.2 Equivalent Load............................................ 1 1.3.3 External Market Buyer...................................... 1 1.3.4 External Resource.......................................... 2 1.3.5 Fixed Transmission Right................................... 2 1.3.6 Generating Market Buyer.................................... 2 1.3.7 Generator Forced Outage.................................... 2 1.3.8 Generator Maintenance Outage............................... 2 1.3.9 Generator Planned Outage................................... 2 1.3.10 Internal Market Buyer..................................... 2 1.3.11 Inadvertent Interchange................................... 2 1.3.12 Market Operations Center.................................. 3 1.3.13 Maximum Generation Emergency.............................. 3 1.3.14 Minimum Generation Emergency.............................. 3 1.3.14a NERC Interchange Distribution Calculator................. 3 1.3.15 Network Resource.......................................... 3 1.3.16 Network Service User...................................... 3 1.3.17 Network Transmission Service.............................. 3 1.3.18 Normal Maximum Generation................................. 3 1.3.19 Normal Minimum Generation................................. 3 1.3.20 Offer Data................................................ 3 1.3.21 Office of the Interconnection Control Center.............. 4 1.3.22 Operating Day............................................. 4 1.3.23 Operating Margin.......................................... 4 1.3.24 Operating Margin Customer................................. 4 1.3.25 PJM Interchange........................................... 4 1.3.26 PJM Interchange Export.................................... 4 1.3.27 PJM Interchange Import.................................... 5 1.3.28 PJM Open Access Same-time Information System.............. 5 1.3.29 Point-to-Point Transmission Service....................... 5 1.3.30 Ramping Capability........................................ 5 1.3.31 Regulation................................................ 5 1.3.32 Regulation Class.......................................... 5 1.3.32a Spot Market Backup....................................... 5 1.3.33 Spot Market Energy........................................ 5 1.3.34 Transmission Congestion Charge............................ 5 1.3.35 Transmission Congestion Credit............................ 6 1.3.36 Transmission Customer..................................... 6 1.3.37 Transmission Forced Outage................................ 6 1.3.37a Transmission Loading Relief.............................. 6 1.3.37b Transmission Loading Relief Customer..................... 6 1.3.38 Transmission Planned Outage............................... 6 1.4 Market Buyers.................................................... 6 1.4.1 Qualification.............................................. 6 1.4.2 Submission of Information.................................. 7 iv 1.4.3 Fees and Costs............................................. 7 1.4.4 Office of the Interconnection Determination................ 8 1.4.5 Existing Participants...................................... 8 1.4.6 Withdrawal................................................. 8 1.5 Market Sellers................................................... 9 1.5.1 Qualification.............................................. 9 1.5.2 Withdrawal................................................. 9 1.6 Office of the Interconnection.................................... 9 1.6.1 Operation of the PJM Interchange Energy Market............. 9 1.6.2 Scope of Services.......................................... 9 1.6.3 Records and Reports........................................10 1.6.4 PJM Manuals................................................11 1.7 General..........................................................11 1.7.1 Market Sellers.............................................11 1.7.2 Market Buyers..............................................11 1.7.3 Agents.....................................................11 1.7.4 General Obligations of the Market Participants.............11 1.7.5 Market Operations Center...................................13 1.7.6 Scheduling and Dispatching.................................13 1.7.7 Pricing....................................................13 1.7.8 Generating Market Buyer Resources..........................13 1.7.9 Delivery to an External Market Buyer.......................13 1.7.10 Other Transactions........................................14 1.7.11 Emergencies...............................................14 1.7.12 Fees and Charges..........................................14 1.7.13 Relationship to PJM Control Area..........................14 1.7.14 PJM Manuals...............................................15 1.7.15 Corrective Action.........................................15 1.7.16 Recording.................................................15 1.7.17 Operating Reserves........................................15 1.7.18 Regulation................................................15 1.7.19 Ramping...................................................16 1.7.20 Communication and Operating Requirements..................16 1.7.21 Multi-settlement System...................................17 1.8 Selection, Scheduling and Dispatch Procedure Adjustment Process..17 1.8.1 PJM Dispute Resolution Agreement...........................17 1.8.2 Market or Control Area Hourly Operational Disputes.........17 1.9 Prescheduling....................................................18 1.9.1 Outage Scheduling..........................................18 1.9.2 Planned Outages............................................18 1.9.3 Generator Maintenance Outages..............................19 1.9.4 Forced Outages.............................................19 1.9.5 Market Participant Responsibilities........................20 1.9.6 Internal Market Buyer Responsibilities.....................20 1.9.7 Market Seller Responsibilities.............................20 1.9.8 Office of the Interconnection Responsibilities.............20 1.10 Scheduling......................................................21 vi 1.10.1 Day-Ahead Scheduling......................................21 1.10.2 Pool-Scheduled Resources..................................23 1.10.3 Self-scheduled Resources..................................24 1.10.4 Capacity Resources........................................24 1.10.5 External Resources........................................25 1.10.6 External Market Buyers....................................26 1.10.6A Transmission Loading Relief Customers....................26 1.10.7 Bilateral Transactions....................................26 1.10.8 Office of the Interconnection Responsibilities............27 1.10.9 Hourly Scheduling.........................................27 1.11 Dispatch........................................................28 1.11.1 Resource Output...........................................28 1.11.2 Operating Basis...........................................28 1.11.3 Pool-dispatched Resources.................................29 1.11.3a Maximum Generation Emergency.............................29 1.11.4 Regulation................................................29 1.11.5 PJM Open Access Same-time Information System..............29 2. CALCULATION OF LOCATIONAL MARGINAL PRICES..............................30 2.1 Introduction.....................................................30 2.2 General..........................................................30 2.3 Determination of System Conditions Using the State Estimator.....31 2.4 Determination of Energy Offers Used in Calculating Locational Marginal Prices..................................................31 2.5 Calculation of Locational Marginal Prices........................32 2.6 Performance Evaluation...........................................32 3. ACCOUNTING AND BILLING.................................................33 3.1 Introduction.....................................................33 3.2 Market Buyers....................................................33 3.2.1 Spot Market Energy.........................................33 3.2.2 Regulation.................................................34 3.2.3 Operating Reserves.........................................35 3.2.4 Transmission Congestion....................................35 3.2.5 Transmission Losses........................................35 3.2.6 Emergency Energy...........................................36 3.2.7 Billing....................................................36 3.3 Market Sellers...................................................36 3.3.1 Spot Market Energy.........................................37 3.3.2 Regulation.................................................37 3.3.3 Operating Reserves.........................................37 3.3.4 Emergency Energy...........................................37 3.3.5 Billing....................................................38 3.4 Transmission Customers...........................................38 3.4.1 Transmission Congestion....................................38 3.4.2 Transmission Losses........................................38 3.4.3 Billing....................................................38 3.5 Other Control Areas..............................................39 3.5.1 Energy Sales...............................................39 3.5.2 Operating Margin Sales.....................................39 3.5.3 Transmission Congestion....................................39 3.5.4 Billing....................................................39 vii 3.6 Metering Reconciliation..........................................39 3.6.1 Meter Correction Billing...................................39 3.6.2 Meter Corrections Between Market Participants..............40 3.6.3 500 kV Meter Errors........................................40 3.6.4 Meter Corrections Between Control Areas....................40 3.6.5 Meter Correction Data......................................40 3.6.6 Correction Limits..........................................40 4. RATE TABLE.............................................................41 4.1 Offered Price Rates..............................................41 4.2 Transmission Losses..............................................41 4.3 Emergency Energy Purchases.......................................41 5. CALCULATION OF TRANSMISSION CONGESTION CHARGES AND CREDITS ............42 5.1 Transmission Congestion Charge Calculation.......................42 5.1.1 Calculation by Office of the Interconnection...............42 5.1.2 General....................................................42 5.1.3 Network Service User Calculation...........................42 5.1.4 Transmission Customer Calculation..........................42 5.1.5 Operating Margin Customer Calculation......................42 5.1.6 Transmission Loading Relief Customer Calculation...........43 5.1.7 Total Transmission Congestion Charges......................43 5.2 Transmission Congestion Credit Calculation.......................43 5.2.1 Eligibility................................................43 5.2.2 Fixed Transmission Rights..................................43 5.2.3 Target Allocation for Network Service Users................44 5.2.4 Target Allocation for other Holders........................44 5.2.5 Calculation of Transmission Congestion Credits.............44 5.2.6 Distribution of Excess Congestion Charges..................44 5.3 Unscheduled Transmission Service (Loop Flow).....................44a SCHEDULE 2 - COMPONENTS OF COST........................................... 1 SCHEDULE 2A - EXPLANATION OF THE TREATMENT OF THE COSTS OF EMISSIONS ALLOWANCES.................................................. 1 SCHEDULE 3 - ALLOCATION OF THE COST AND EXPENSES OF THE OFFICE OF THE INTERCONNECTION.............................................. 1 SCHEDULE 4 - STANDARD FORM OF AGREEMENT TO BECOME A MEMBER OF THE LLC..... 1 SCHEDULE 5 - PJM DISPUTE RESOLUTION PROCEDURES............................ 1 1. DEFINITIONS............................................................ 1 1.1 Alternate Dispute Resolution Committee........................... 1 1.2 MAAC Dispute Resolution Committee................................ 1 1.3 Related PJM Agreements........................................... 1 2. PURPOSES AND OBJECTIVES................................................ 1 2.1 Common and Uniform Procedures.................................... 1 2.2 Interpretation................................................... 1 3. NEGOTIATION AND MEDIATION.............................................. 2 3.1 When Required.................................................... 2 3.2 Procedures....................................................... 2 3.2.1 Initiation................................................. 2 3.2.2 Selection of Mediator...................................... 2 3.2.3 Advisory Mediator.......................................... 2 3.2.4 Mediation Process.......................................... 3 3.2.5 Mediator's Assessment...................................... 3 3.3 Costs............................................................ 4 viii 4. ARBITRATION............................................................ 4 4.1 When Required.................................................... 4 4.2 Binding Decision................................................. 4 4.3 Initiation....................................................... 4 4.4 Selection of Arbitrator(s)....................................... 4 4.5 Procedures....................................................... 5 4.6 Summary Disposition and Interim Measures......................... 5 4.6.1 Lack of Good Faith Basis................................... 5 4.6.2 Discovery Limits........................................... 5 4.6.3 Interim Decision........................................... 5 4.7 Discovery of Facts............................................... 6 4.7.1 Discovery Procedures....................................... 6 4.7.2 Procedures Arbitrator...................................... 6 4.8 Evidentiary Hearing.............................................. 6 4.9 Confidentiality.................................................. 7 4.9.1 Designation................................................ 7 4.9.2 Compulsory Disclosure...................................... 7 4.9.3 Public Information......................................... 7 4.10 Timetable....................................................... 8 4.11 Advisory Interpretations........................................ 8 4.12 Decisions....................................................... 8 4.13 Costs........................................................... 8 4.14 Enforcement..................................................... 9 5. ALTERNATE DISPUTE RESOLUTION COMMITTEE................................. 9 5.1 Membership....................................................... 9 5.1.1 Representatives............................................ 9 5.1.2 Term....................................................... 9 5.2 Voting Requirements.............................................. 9 5.3 Officers......................................................... 9 5.4 Meetings.........................................................10 5.5 Responsibilities.................................................10 SCHEDULE 6 - REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL ........... 1 1. REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL...................... 1 1.1 Purpose and Objectives........................................... 1 1.2 Conformity with NERC and MAAC Criteria........................... 1 1.3 Establishment of Committees...................................... 1 1.4 Contents of the Regional Transmission Expansion Plan............. 2 1.5 Procedure for Development of the Regional Transmission Expansion Plan............................................................. 2 1.5.1 Commencement of the Process................................ 2 1.5.2 Development of Scope, Assumptions and Procedures........... 3 1.5.3 Scope of Studies........................................... 3 1.5.4 Supply of Data............................................. 3 1.5.5 Coordination of the Regional Transmission Expansion Plan... 3 1.5.6 Development of the Recommended Regional Transmission Expansion Plan............................................. 3 1.6 Approval of the Final Regional Transmission Expansion Plan....... 4 1.7 Obligation to Build.............................................. 5 1.8 Relationship to the PJM Control Area Open Access Transmission PJM Tariff........................................................... 5 ix SCHEDULE 7 - UNDERFREQUENCY RELAY OBLIGATIONS AND CHARGES ................ 1 1. UNDERFREQUENCY RELAY OBLIGATION........................................ 1 1.1 Application...................................................... 1 1.2 Obligations...................................................... 1 2. UNDERFREQUENCY RELAY CHARGES........................................... 1 3. DISTRIBUTION OF UNDERFREQUENCY RELAY CHARGES........................... 2 3.1 Share of Charges................................................. 2 3.2 Allocation by the Office of the Interconnection.................. 2 SCHEDULE 8 -DELEGATION OF RELIABILITY RESPONSIBILITIES.................... 1 1. DELEGATION............................................................. 1 2. NEW PARTIES............................................................ 1 3. IMPLEMENTATION OF RELIABILITY ASSURANCE AGREEMENT...................... 1 SCHEDULE 9 - EMERGENCY PROCEDURE CHARGES.................................. 1 1. EMERGENCY PROCEDURE CHARGE............................................. 1 2. DISTRIBUTION OF EMERGENCY PROCEDURE CHARGES............................ 1 2.1 Complying Parties................................................ 1 2.2 All Parties...................................................... 1 SCHEDULE 10 - ACCOUNTING FOR UNSCHEDULED TRANSMISSION SERVICE COMPENSATION...................................................... 1 x AMENDED AND RESTATED OPERATING AGREEMENT OF PJM INTERCONNECTION, L.L.C. This Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., dated as of this 2nd day of June, 1997, amends and restates as of the Effective Date the Operating Agreement of PJM Interconnection, L.L.C. filed with the FERC on April 2, 1997, as amended. WHEREAS, certain of the Members have previously entered into an agreement, originally dated September 26, 1956, as amended and supplemented up to and including December 31, 1996, stating "their respective rights and obligations with respect to the coordinated operation of their electric supply systems and the interchange of electric capacity and energy among their systems" (such agreement as amended and supplemented being referred to as the "Original PJM Agreement"), and which coordinated operations and interchange came to be known as the PJM Interconnection (the "Interconnection"); and WHEREAS, pursuant to a resolution of June 16, 1993, an unincorporated association comprised of the parties to the Original PJM Agreement was formed for the purpose of implementation of the Original PJM Agreement as it then existed and as it subsequently has been amended and supplemented, such association being known as the "PJM Interconnection Association"; and WHEREAS, because of changes in federal law and policy, the Original PJM Agreement, together with other documents and agreements, was amended, restated and submitted to FERC on December 31, 1996 to restructure fundamental aspects of the operation of the Interconnection; and WHEREAS, so that the provisions of the Original PJM Agreement could be placed into effect consistent with a February 28, 1997 order of FERC, including those provisions related to the governance of the Interconnection, the parties to the Original PJM Agreement, along with the other interested parties, approved the conversion of the PJM Interconnection Association into the LLC pursuant to the provisions of the Delaware Limited Liability Company Act, as amended (the "Delaware LLC Act"), pursuant to a Certificate of Formation (the "Certificate of Formation") and a Certificate of Conversion (the "Certificate of Conversion"), each filed with the Delaware Secretary of State (the "Recording Office") on March 31, 1997; and WHEREAS, the Members wish to amend and restate the Operating Agreement of PJM Interconnection, L.L.C. adopted in connection with the formation of the LLC and as in effect immediately prior to the Effective Date in the form set forth below; and WHEREAS, the Members intend to form an Independent System Operator in accordance with the regulations of the Federal Energy Regulatory Commission; and Now, therefore, in consideration of the foregoing, and of the covenants and agreements hereinafter set forth, the Members hereby agree as follows: 1 DEFINITIONS Unless the context otherwise specifies or requires, capitalized terms used in this Agreement shall have the respective meanings assigned herein or in the Schedules hereto for all purposes of this Agreement (such definitions to be equally applicable to both the singular and the plural forms of the terms defined). Unless otherwise specified, all references herein to Sections, Schedules, Exhibits or Appendices are to Sections, Schedules, Exhibits or Appendices of this Agreement. As used in this Agreement: 1.1 ACT. "Act" shall mean the Delaware Limited Liability Company Act, Title 6, (SS) 18-101 to 18-1109 of the Delaware Code. 1.2 AFFILIATE. "Affiliate" shall mean any two or more entities, one of which controls the other or that are under common control. "Control" shall mean the possession, directly or indirectly, of the power to direct the management or policies of an entity. Ownership of publicly-traded equity securities of another entity shall not result in control or affiliation for purposes of this Agreement if the securities are held as an investment, the holder owns (in its name or via intermediaries) less than 10 percent of the outstanding securities of the entity, the holder does not have representation on the entity's board of directors (or equivalent managing entity) or vice versa, and the holder does not in fact exercise influence over day-to-day management decisions. Unless the contrary is demonstrated to the satisfaction of the Members Committee, control shall be presumed to arise from the ownership of or the power to vote, directly or indirectly, ten percent or more of the voting securities of such entity. 1.3 AGREEMENT. "Agreement" shall mean this Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., including all Schedules, Exhibits, Appendices, addenda or supplements hereto, as amended from time to time. 1.4 ANNUAL MEETING OF THE MEMBERS. "Annual Meeting of the Members" shall mean the meeting specified in Section 8.3.1 of this Agreement. 1.5 BOARD MEMBER. "Board Member" shall mean a member of the PJM Board. 1.6 CAPACITY RESOURCE. "Capacity Resource" shall mean the net capacity from owned or contracted for generating facilities all of which (i) are accredited to a Load Serving Entity pursuant to the procedures set forth in the Reliability Assurance Agreement and (ii) are committed to satisfy that Load Serving Entity's obligations under the Reliability Assurance Agreement and this Agreement. 2 1.7 CONTROL AREA. "Control Area" shall mean an electric power system or combination of electric power systems bounded by interconnection metering and telemetry to which a common automatic generation control scheme is applied in order to: (a) match the power output of the generators within the electric power system(s) and energy purchased from entities outside the electric power system(s), with the load within the electric power system(s); (b) maintain scheduled interchange with other Control Areas, within the limits of Good Utility Practice; (c) maintain the frequency of the electric power system(s) within reasonable limits in accordance with Good Utility Practice and the criteria of NERC and the applicable regional reliability council of NERC; (d) maintain power flows on transmission facilities within appropriate limits to preserve reliability; and (e) provide sufficient generating capacity to maintain operating reserves in accordance with Good Utility Practice. 1.8 ELECTRIC DISTRIBUTOR. "Electric Distributor" shall mean a Member that owns or leases with rights equivalent to ownership electric distribution facilities that are used to provide electric distribution service to electric load within the PJM Control Area. 1.9 EFFECTIVE DATE. "Effective Date" shall mean August 1, 1997, or such later date that FERC permits this Agreement to go into effect. 1.10 EMERGENCY. "Emergency" shall mean: (i) an abnormal system condition requiring manual or automatic action to maintain system frequency, or to prevent loss of firm load, equipment damage, or tripping of system elements that could adversely affect the reliability of an electric system or the safety of persons or property; or (ii) a fuel shortage requiring departure from normal operating procedures in order to minimize the use of such scarce fuel; or (iii) a condition that requires implementation of emergency procedures as defined in the PJM Manuals. 1.11 END-USE CUSTOMER. "End-Use Customer" shall mean a Member that is a retail end-user of electricity within the PJM Control Area. 1.12 FERC. "FERC" shall mean the Federal Energy Regulatory Commission or any successor federal agency, commission or department exercising jurisdiction over this Agreement. 3 1.13 FINANCE COMMITTEE. "Finance Committee" shall mean the body formed pursuant to Section 7.5.1 of this Agreement. 1.14 GENERATION OWNER. "Generation Owner" shall mean a Member that owns or leases with rights equivalent to ownership facilities for the generation of electric energy that are located within the PJM Control Area. Purchasing all or a portion of the output of a generation facility shall not be sufficient to qualify a Member as a Generation Owner. 1.15 GOOD UTILITY PRACTICE. "Good Utility Practice" shall mean any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather is intended to include acceptable practices, methods, or acts generally accepted in the region. 1.16 INTERCONNECTION. "Interconnection" shall mean the coordinated operations and interchange resulting from the Original PJM Agreement as continued in this Agreement. 1.17 LLC. "LLC" shall mean PJM Interconnection, L.L.C., a Delaware limited liability company. 1.18 LOAD SERVING ENTITY. "Load Serving Entity" shall mean an entity, including a load aggregator or power marketer, (1) serving end-users within the PJM Control Area, and (2) that has been granted the authority or has an obligation pursuant to state or local law, regulation or franchise to sell electric energy to end-users located within the PJM Control Area, or the duly designated agent of such an entity . 1.19 LOCATIONAL MARGINAL PRICE. "Locational Marginal Price" shall mean the hourly integrated market clearing marginal price for energy at the location the energy is delivered or received, calculated as specified in Section 2 of Schedule 1 of this Agreement. 1.20 MAAC. "MAAC" shall mean the Mid-Atlantic Area Council, a reliability council under (S) 202 of the Federal Power Act established pursuant to the MAAC Agreement dated August 1, 1994, or any successor thereto. 4 1.21 MARKET BUYER. "Market Buyer" shall mean a Member that has met reasonable creditworthiness standards established by the Office of the Interconnection and that is otherwise able to make purchases in the PJM Interchange Energy Market or PJM Capacity Credit Market. 1.22 MARKET PARTICIPANT. "Market Participant" shall mean a Market Buyer or a Market Seller, or both. 1.23 MARKET SELLER. "Market Seller" shall mean a Member that has met reasonable creditworthiness standards established by the Office of the Interconnection and that is otherwise able to make sales in the PJM Interchange Energy Market or PJM Capacity Credit Market. 1.24 MEMBER. "Member" shall mean an entity that satisfies the requirements of Section 11.6 of this Agreement and that (i) is a member of the LLC immediately prior to the Effective Date, or (ii) has executed an Additional Member Agreement in the form set forth in Schedule 4 hereof. 1.25 MEMBERS COMMITTEE. "Members Committee" shall mean the committee specified in Section 8 of this Agreement composed of representatives of all the Members. 1.26 NERC. "NERC" shall mean the North American Electric Reliability Council, or any successor thereto. 1.27 OFFICE OF THE INTERCONNECTION. "Office of the Interconnection" shall mean the employees and agents of the LLC engaged in implementation of this Agreement and administration of the PJM Tariff, subject to the supervision and oversight of the PJM Board acting pursuant to this Agreement. 1.28 OPERATING RESERVE. "Operating Reserve" shall mean the amount of generating capacity scheduled to be available for a specified period of an Operating Day to ensure the reliable operation of the PJM Control Area, as specified in the PJM Manuals. 1.29 ORIGINAL PJM AGREEMENT. "Original PJM Agreement" shall mean that certain agreement between certain of the Members, originally dated September 26, 1956, and as amended and supplemented up to and including December 31, 1996, relating to the coordinated operation of their electric supply systems and the interchange of electric capacity and energy among their systems. 5 1.30 OTHER SUPPLIER. "Other Supplier" shall mean a Member that is (i) a seller, buyer or transmitter of electric capacity or energy in, from or through the PJM Control Area, and (ii) is not a Generation Owner, Electric Distributor, Transmission Owner or End-Use Customer. 1.31 PJM BOARD. "PJM Board" shall mean the Board of Managers of the LLC, acting pursuant to this Agreement. 1.32 PJM CONTROL AREA. "PJM Control Area" shall mean the Control Area recognized by NERC as the PJM Control Area. 1.33 PJM DISPUTE RESOLUTION PROCEDURES "PJM Dispute Resolution Procedures" shall mean the procedures for the resolution of disputes set forth in Schedule 5 of this Agreement. 1.34 PJM INTERCHANGE ENERGY MARKET. "PJM Interchange Energy Market" shall mean the regional competitive market administered by the Office of the Interconnection for the purchase and sale of spot electric energy at wholesale in interstate commerce and related services established pursuant to Schedule 1 to this Agreement. 1.35 PJM MANUALS. "PJM Manuals" shall mean the instructions, rules, procedures and guidelines established by the Office of the Interconnection for the operation, planning, and accounting requirements of the PJM Control Area and the PJM Interchange Energy Market. 1.36 PJM TARIFF. "PJM Tariff" shall mean the PJM Open Access Transmission Tariff providing transmission service within the PJM Control Area, including any schedules, appendices, or exhibits attached thereto, as in effect from time to time. 1.37 PLANNING PERIOD. "Planning Period" shall initially mean the 12 months beginning June 1 and extending through May 31 of the following year, or such other period established by the Reliability Committee established under the Reliability Assurance Agreement. 1.38 PRESIDENT. "President" shall have the meaning specified in Section 9.2. 6 1.39 RELATED PARTIES. "Related Parties" shall mean, solely for purposes of the governance provisions of this Agreement: (i) any generation and transmission cooperative and one of its distribution cooperative members; and (ii) any joint municipal agency and one of its members. For purposes of this Agreement, representatives of state or federal government agencies shall not be deemed Related Parties with respect to each other, and a public body's regulatory authority, if any, over a Member shall not be deemed to make it a Related Party with respect to that Member. 1.40 RELIABILITY ASSURANCE AGREEMENT. "Reliability Assurance Agreement" shall mean that certain agreement, dated June 2, 1997 and as amended from time to time, establishing obligations, standards and procedures for maintaining the reliable operation of the PJM Control Area. 1.41 SECTOR VOTES. "Sector Votes" shall mean the affirmative and negative votes of each sector on the Members Committee, as specified in Section 8.4. 1.42 STATE. "State" shall mean the District of Columbia and any State or Commonwealth of the United States. 1.43 SYSTEM. "System" shall mean the interconnected electric supply system of a Member and its interconnected subsidiaries exclusive of facilities which it may own or control outside of the PJM Control Area. Each Member may include in its system the electric supply systems of any party or parties other than Members which are within the PJM Control Area, provided its interconnection agreements with such other party or parties do not conflict with such inclusion. 1.44 TRANSMISSION FACILITIES. "Transmission Facilities" shall mean facilities that: (i) are within the PJM Control Area; (ii) meet the definition of transmission facilities pursuant to FERC's Uniform System of Accounts or have been classified as transmission facilities in a ruling by FERC addressing such facilities; and (iii) have been demonstrated to the satisfaction of the Office of the Interconnection to be integrated with the PJM Control Area transmission system and integrated into the planning and operation of the PJM Control Area to serve all of the power and transmission customers within the PJM Control Area. 1.45 TRANSMISSION OWNER. "Transmission Owner" shall mean a Member that owns or leases with rights equivalent to ownership Transmission Facilities. Taking transmission service shall not be sufficient to qualify a Member as a Transmission Owner. 7 1.46 TRANSMISSION OWNERS AGREEMENT. "Transmission Owners Agreement" shall mean that certain agreement, dated June 2, 1997 and as amended from time to time, by and among Transmission Owners in the PJM Control Area providing for an open-access transmission tariff in the PJM Control Area, and for other purposes. 1.47 USER GROUP. "User Group" shall mean a group formed pursuant to Section 8.7 of this Agreement. 1.48 VOTING MEMBER "Voting Member" shall mean (i) a Member as to which no other Member is an Affiliate or Related Party, or (ii) a Member together with any other Members as to which it is an Affiliate or Related Party. 1.49 WEIGHTED INTEREST. "Weighted Interest" shall be equal to (0.1(1/N) + 0.5(B/C) + 0.2(D/E) + 0.2(F/G)), where: N = the total number of Members B = the Member's internal peak demand for the previous calendar year C = the sum of factor B for all Members D = the Member's net installed generating capacity located in the PJM Control Area as of January 1 of the current calendar year E = the sum of factor D for all Members F = the sum of the Member's circuit miles of transmission facilities multiplied by the respective operating voltage for facilities 100 kV and above as of January 1 of the current calendar year G = the sum of factor F for all Members 2. FORMATION, NAME; PLACE OF BUSINESS 2.1 FORMATION OF LLC; CERTIFICATE OF FORMATION. The Members of the LLC hereby: (a) acknowledge the conversion of the PJM Interconnection Association into the LLC, a limited liability company pursuant to the Act, by virtue of the filing of both the Certificate of Formation and the Certificate of Conversion with the Recording Office, effective as of March 31, 1997; (b) confirm and agree to their status as Members of the LLC; (c) enter into this Agreement for the purpose of amending and restating the rights, duties, and relationship of the Members; and (d) agree that if the laws of any jurisdiction in which the LLC transacts business so require, the PJM Board also shall file, with the appropriate office in that jurisdiction, any documents necessary for the LLC to qualify to transact business under such laws; and (ii) agree 8 and obligate themselves to execute, acknowledge, and cause to be filed for record, in the place or places and manner prescribed by law, any amendments to the Certificate of Formation as may be required, either by the Act, by the laws of any jurisdiction in which the LLC transacts business, or by this Agreement, to reflect changes in the information contained therein or otherwise to comply with the requirements of law for the continuation, preservation, and operation of the LLC as a limited liability company under the Act. 2.2 NAME OF LLC. The name under which the LLC shall conduct its business is "PJM Interconnection, L.L.C." 2.3 PLACE OF BUSINESS. The location of the principal place of business of the LLC shall be 955 Jefferson Avenue, Valley Forge Corporate Center, Norristown, Pennsylvania 19403- 2497. The LLC may also have offices at such other places both within and without the State of Delaware as the PJM Board may from time to time determine or the business of the LLC may require. 2.4 REGISTERED OFFICE AND REGISTERED AGENT. The street address of the initial registered office of the LLC shall be 1209 Orange Street, Wilmington, Delaware 19801, and the LLC's registered agent at such address shall be The Corporation Trust Company. The registered office and registered agent may be changed by resolution of the PJM Board. 3. PURPOSES AND POWERS OF LLC 3.1 PURPOSES. The purposes of the LLC shall be: (a) to operate in accordance with FERC requirements as an Independent System Operator, comprised of the PJM Board, the Office of the Interconnection, and the Members Committee, with the authorities and responsibilities set forth in this Agreement; (b) as necessary for the operation of the Interconnection as specified above: (i) to acquire and obtain licenses, permits and approvals, (ii) to own or lease property, equipment and facilities, and (iii) to contract with third parties to obtain goods and services, provided that, the L.L.C. may procure goods and services from a Member only after open and competitive bidding; and (c) to engage in any lawful business permitted by the Act or the laws of any jurisdiction in which the LLC may do business and to enter into any lawful transaction and engage in any lawful activities in furtherance of the foregoing purposes and as may be necessary, incidental or convenient to carry out the business of the LLC as contemplated by this Agreement. 9 3.2 POWERS. The LLC shall have the power to do any and all acts and things necessary, appropriate, advisable, or convenient for the furtherance and accomplishment of the purposes of the LLC, including, without limitation, to engage in any kind of activity and to enter into and perform obligations of any kind necessary to or in connection with, or incidental to, the accomplishment of the purposes of the LLC, so long as said activities and obligations may be lawfully engaged in or performed by a limited liability company under the Act. 4. EFFECTIVE DATE AND TERMINATION 4.1 EFFECTIVE DATE AND TERMINATION. (a) The existence of the LLC commenced on March 31, 1997, as provided in the Certificate of Formation and Certificate of Conversion which were filed with the Recording Office on March 31, 1997. This Agreement shall amend and restate the Operating Agreement of PJM Interconnection, L.L.C. as of the Effective Date. (b) The LLC shall continue in existence until terminated in accordance with the terms of this Agreement. The withdrawal or termination of any Member is subject to the provisions of Section 18.18 of this Agreement. (c) Any termination of this Agreement or withdrawal of any Member from the Agreement shall be filed with the FERC and shall become effective only upon the FERC's approval. GOVERNING LAW. This Agreement and all questions with respect to the rights and obligations of the Members, the construction, enforcement and interpretation hereof, and the formation, administration and termination of the LLC shall be governed by the provisions of the Act and other applicable laws of the State of Delaware, and the Federal Power Act. 10 5. WORKING CAPITAL AND CAPITAL CONTRIBUTIONS 5.1 FUNDING OF WORKING CAPITAL AND CAPITAL CONTRIBUTIONS. (a) The Office of the Interconnection shall attempt to obtain financing of up to twenty-five percent (25%) of the approved annual operating budget of the LLC adopted by the PJM Board pursuant to (S) 7.5.2 of this Agreement to meet the working capital needs of the LLC, which shall be limited to such working capital needs that arise from timing in cash flows from interchange accounting, tariff administration and payment of the operating costs of the Office of the Interconnection. Such financing, which shall be non-recourse to the Members of the LLC and which shall be for a stated term without penalty for prepayment, may be obtained by borrowing the amount required at market-based interest rates, negotiated on an arm's length basis, (i) from a Member or Members or (ii) from a commercial lender, supported, if necessary, by credit enhancements provided by a Member or Members; provided, however, no Member shall be obligated to provide such financing or credit enhancements. The LLC shall make such filings and seek such approvals as necessary in order for the principal, interest and fees related to any such borrowing to be repaid through charges under the PJM Tariff as appropriate under Schedule 3 of this Agreement. (b) In the event financing of the working capital needs of the Office of the Interconnection is unavailable on commercially reasonable terms, the PJM Board may require the Members to contribute capital in the aggregate up to five million two hundred thousand dollars ($5,200,000) for the working capital needs that could not be financed; provided that in such event each Member's obligation to contribute additional capital shall be in proportion to its Weighted Interest, multiplied by the amount so requested by the PJM Board. Each Member that contributes such capital shall be entitled to earn a return on the contribution to the extent such contribution has not been repaid, which return shall be at a fair market rate as determined by the PJM Board but in no event less than the current interest rate established pursuant to 18 C.F.R. (S) 35.19a(a)(2)(iii); provided further, that any Member not wanting to contribute the requested capital contribution may withdraw from the LLC upon 90 days written notice as provided in Section 18.18.2 of this Agreement. 5.2 CONTRIBUTIONS TO ASSOCIATION. All contributions prior to the Effective Date of the original Operating Agreement of PJM Interconnection, L.L.C. of cash or other assets to the PJM Interconnection Association by persons who are now or in the future may become Members of the LLC shall be deemed contributions by such Members to the LLC. 6. TAX STATUS AND DISTRIBUTIONS 6.1 TAX STATUS. The LLC shall make all necessary filings under the applicable Treasury Regulations to have the LLC taxed as a corporation. 11 6.2 RETURN OF CAPITAL CONTRIBUTIONS. (a) In the event Members are required to contribute capital to the LLC in accordance with Section 5.1 herein, the LLC shall request the Transmission Owners to recover such working capital through charges under the PJM Tariff as provided in Schedule 3 of this Agreement. In the event all or a portion of the working capital is recovered pursuant to the PJM Tariff, such amount(s) shall be returned to the Members in accordance with their actual contributions. (b) Except for return of capital contributions and liquidating distributions as provided in the foregoing section and Section 6.3 herein, respectively, the LLC does not intend to make any distributions of cash or other assets to its Members. 6.3 LIQUIDATING DISTRIBUTION. Upon termination or liquidation of the LLC, the cash or other assets of the LLC shall be distributed as follows: (a) first, in the event the LLC has any liabilities at the time of its termination or dissolution, the LLC shall liquidate such of its assets as is necessary to satisfy such liabilities; (b) second, any capital contribution in cash or in kind by any Member of the PJM Interconnection Association prior to the Effective Date shall be distributed by the LLC back to such Member in the form received by the PJM Interconnection Association; and (c) third, any remaining assets of the LLC shall be distributed to the Members in proportion to their Weighted Interests. 7. PJM BOARD 7.1 COMPOSITION. There shall be an LLC Board of Managers, referred to herein as the "PJM Board," composed of seven voting members, with the President as a non-voting member. The seven voting Board Members shall be elected by the Members Committee from a slate of candidates for the then-existing vacancies or expiring terms on the PJM Board. An independent consultant, retained by the Office of the Interconnection upon consideration of the advice and recommendations of the Members Committee, shall be directed to prepare a list of persons qualified and willing to serve on the PJM Board. Not later than 30 days prior to each Annual Meeting of the Members, the Office of the Interconnection shall distribute to the representatives on the Members Committee a slate from among the list proposed by the independent consultant, along with information on the background and experience of the persons on the slate appropriate to evaluating their fitness for service on the PJM Board. Elections for the PJM Board shall be held at each Annual Meeting of the Members, for the purpose of selecting the initial PJM Board in accordance with the provisions of Section 7.3(a), or selecting a person to fill the seat of a Board Member whose term is expiring. Should the Members Committee fail to elect a full PJM Board from the slate proposed by the independent consultant, the Office of the Interconnection shall direct the independent consultant, or a replacement consultant selected by the Office of the Interconnection, to propose a list for a slate of nominees for any vacancies on the PJM Board for consideration by the Members at the next regular meeting of the Members Committee. 12 7.2 QUALIFICATIONS. A Board Member shall not be, and shall not have been at any time within five years of election to the PJM Board, a director, officer or employee of a Member or of an Affiliate or Related Party of a Member. Except as provided in the LLC's Standards of Conduct filed with the FERC, at any time while serving on the PJM Board, a Board Member shall have no direct business relationship or other affiliation with any Member or its Affiliates or Related Parties. Of the seven Board Members, four shall have expertise and experience in the areas of corporate leadership at the senior management or board of directors level, or in the professional disciplines of finance or accounting, engineering, or utility laws and regulation. Of the other three Board Members, one shall have expertise and experience in the operation or concerns of transmission dependent utilities, one shall have expertise and experience in the operation or planning of transmission systems, and one shall have expertise and experience in the area of commercial markets and trading and associated risk management. 7.3 TERM OF OFFICE. (a) The persons serving as the Board of Managers of the LLC immediately prior to the Effective Date shall continue in office until the first Annual Meeting of the Members. At the first Annual Meeting of the Members, the then current members of the PJM Board who desire to continue in office shall be elected by the Members to serve until the second Annual Meeting of the Members or until their successors are elected, along with such additional persons as necessary to meet the composition requirements of Section 7.1 and the qualification requirements of Section 7.2. (b) A Board Member shall serve for a term of three years commencing with the Annual Meeting of the Members at which the Board Member was elected; provided, however, that two of the Board Members elected at the first Annual Meeting of the Members following the Effective Date shall be chosen by lot to serve a term of one year, three of such Board Members shall be chosen by lot to serve a term of two years and the final two such Board Members shall serve a term of three years. (c) Vacancies on the PJM Board occurring between Annual Meetings of the Members shall be filled by vote of the then remaining Board Members; a Board Member so selected shall serve until the next Annual Meeting at which time a person shall be elected to serve the balance of the term of the vacant Board Seat. Removal of a Board Member shall require the approval of the Members Committee. 7.4 QUORUM. The presence in person or by telephone or other authorized electronic means of a majority of the voting Board Members shall constitute a quorum at all meetings of the PJM Board for the transaction of business except as otherwise provided by statute. If a quorum shall not be present, the Board Members then present shall have the power to adjourn the meeting from time to time, until a quorum shall be present. Provided a quorum is present at a meeting, the PJM Board shall act by majority vote of the Board Members present. 13 7.5 OPERATING AND CAPITAL BUDGETS. 7.5.1 FINANCE COMMITTEE. Not later than February 1 of each year, the entities specified below shall select the members of a Finance Committee. The Finance Committee shall be composed of one representative of the parties to the Reliability Assurance Agreement chosen by the parties to that agreement, one representative of the parties to the Transmission Owners Agreement chosen by the parties to that agreement, two representatives of the Members Committee chosen by the Members Committee and that are not representatives of an entity that is a party to the Transmission Owners Agreement or an Affiliate or Related Party of such an entity, one representative of the Office of the Interconnection selected by the President, and two Board Members selected by the PJM Board. The Members Committee shall endeavor to elect members of the Finance Committee that are broadly representative of the diversity of interests among the Members. The Office of the Interconnection shall prepare annual budgets in accordance with processes and procedures established by the PJM Board, and shall timely submit its budgets to the Finance Committee for review. The Finance Committee shall submit its analysis of and recommendations on the budgets to the PJM Board, with copies to the Members Committee. The Finance Committee shall also review and comment upon any additional or amended budgets prepared by the Office of the Interconnection at the request of the PJM Board or the Members Committee. 7.5.2 ADOPTION OF BUDGETS. The PJM Board shall adopt, upon consideration of the advice and recommendations of the Finance Committee, operating and capital budgets for the LLC, and shall distribute to the Members for their information final annual budgets for the following fiscal year not later than 60 days prior to the beginning of each fiscal year of the LLC. 7.6 BY-LAWS. To the extent not inconsistent with any provision of this Agreement, the PJM Board shall adopt such by-laws establishing procedures for the implementation of this Agreement as it may deem appropriate, including but not limited to by-laws governing the scheduling, noticing and conduct of meetings of the PJM Board, selection of a Chair and Vice Chair of the PJM Board, action by the PJM Board without a meeting, and the organization and responsibilities of standing and special committees of the PJM Board. Such by-laws shall not modify or be inconsistent with any of the rights or obligations established by this Agreement. 7.7 DUTIES AND RESPONSIBILITIES OF THE PJM BOARD. In accordance with this Agreement, the PJM Board shall supervise and oversee all matters pertaining to the Interconnection and the LLC, and carry out such other duties as are herein specified, including but not limited to the following duties and responsibilities: i) As its primary responsibility, ensure that the President, the other officers of the LLC, and Office of the Interconnection perform the duties and responsibilities set forth in this Agreement, including but not limited to those set forth in Sections 9.2 through 9.4 and Section 10.4 in a manner 14 consistent with (A) the safe and reliable operation of the Interconnection, (B) the creation and operation of a robust, competitive, and non-discriminatory electric power market in the PJM Control Area, and (C) the principle that a Member or group of Members shall not have undue influence over the operation of the Interconnection; ii) Select the Officers of the LLC; iii) Adopt budgets for the LLC; iv) Approve the Regional Transmission Expansion Plan in accordance with the provisions of the Regional Transmission Expansion Planning Protocol set forth in Schedule 6 of this Agreement. v) On its own initiative or at the request of a User Group as specified herein, submit to the Members Committee such proposed amendments to this Agreement or any Schedule hereto, or a proposed new Schedule, as it may deem appropriate; vi) Petition FERC to modify any provision of this Agreement or any Schedule or practice hereunder that the PJM Board believes to be unjust, unreasonable, or unduly discriminatory under Section 206 of the Federal Power Act, subject to the right of any Member or the Members to intervene in any resulting proceedings; vii) Review for consistency with the creation and operation of a robust, competitive and non-discriminatory electric power market in the PJM Control Area any change to rate design or to non-rate terms and conditions proposed by Transmission Owners for filing under Section 205 of the Federal Power Act. viii) If and to the extent it shall deem appropriate, intervene in any proceeding at FERC initiated by the Members in accordance with Section 11.5(b), and participate in other state and federal regulatory proceedings relating to the interests of the LLC; ix) Review, in accordance with Section 15.1.3, determinations of the Office of the Interconnection with respect to events of default; x) Assess against the other Members in proportion to their Weighted Interest an amount equal to any payment to the Office of the Interconnection, including interest thereon, as to which a Member is in default; xi) Establish reasonable sanctions for failure of a Member to comply with its obligations under this Agreement; xii) Direct the Office of the Interconnection on behalf of the LLC to take appropriate legal or regulatory action against a Member (A) to recover any unpaid amounts due from the Member to the Office of the Interconnection under this Agreement and to make whole any Members subject to an assessment as a result of such unpaid amount, or (B) as may otherwise be 15 necessary to enforce the obligations of this Agreement; xiii) Resolve claims by a Member that the Reliability Committee established by the Reliability Assurance Agreement has exercised its responsibilities in a manner inconsistent with the creation and operation of a robust, competitive and non-discriminatory electric power market in the PJM Control Area, upon due consideration of the views of the Member and of the Reliability Committee, and of the need to preserve the reliability of electric service in the PJM Control Area. xiv) Solicit the views of Members on, and commission from time to time as it shall deem appropriate independent reviews of, (A) the performance of the PJM Interchange Energy Market, (B) compliance by Market Participants with the rules and requirements of the PJM Interchange Energy Market, and (C) the performance of the Office of the Interconnection under performance criteria proposed by the Members Committee and approved by the PJM Board; and xv) Terminate a Member as may be appropriate under the terms of this Agreement. 8. MEMBERS COMMITTEE 8.1 SECTORS. 8.1.1 DESIGNATION. Voting on the Members Committee shall be by sectors. The Members Committee shall be composed of five sectors, one for Generation Owners, one for Other Suppliers, one for Transmission Owners, one for Electric Distributors, and one for End-Use Customers, provided that there are at least five Members in each Sector. Except as specified in Section 8.1.2, each Voting Member shall have one vote. Each Voting Member shall, within thirty (30) days after the Effective Date or, if later, thirty (30) days after becoming a Member, and thereafter not later than 10 days prior to the Annual Meeting of the Members for each annual period beginning with the Annual Meeting of the Members, submit to the President a sealed notice of the sector in which it is qualified to vote or, if qualified to participate in more than one sector, its rank order preference of the sectors in which it wishes to vote, and shall be assigned to its highest-ranked sector that has the minimum number of Members specified above. If a Member is assigned to a sector other than its highest-ranked sector in accordance with the preceding sentence, its higher sector preference or preferences shall be honored as soon as a higher-ranked sector has five or more Members. A Voting Member may designate as its voting sector any sector for which it or its Affiliate or Related Party Members is qualified. The sector designations of the Voting Members shall be announced by the President at the Annual Meeting. 16 8.1.2 RELATED PARTIES. The Members in a group of Related Parties shall each be entitled to a vote, provided that all the Members in a group of Related Parties that chooses to exercise such rights shall be assigned to the Electric Distributor sector. 8.2 REPRESENTATIVES. 8.2.1 APPOINTMENT. Each Member may appoint a representative to serve on the Members Committee, with authority to act for that Member with respect to actions or decisions by the Members Committee. Each Member may appoint an alternate representative to act for that Member at meetings of the Members Committee in the absence of the representative. A Member participating in the PJM Interchange Energy Market through an agent may be represented on the Members Committee by that agent. A Member shall appoint its representative by giving written notice identifying its representative and alternate representative to the Office of the Interconnection. Members that are Affiliates or Related Parties may each appoint a representative and alternate representative to the Members Committee, but shall vote as specified in Section 8.1. 8.2.2 REGULATORY AUTHORITIES. FERC and any other federal agency with regulatory authority over a Member, each State electric utility regulatory commission with regulatory jurisdiction within the PJM Control Area, and each office of consumer advocate from each State all or any part of the territory of which is within the PJM Control Area, may nominate one representative to serve as an ex officio non- voting member of the Members Committee. 8.2.3 INITIAL REPRESENTATIVES. Initial representatives to the Members Committee shall be appointed no later than 30 days after the Effective Date; provided, however, that each representative to the Management Committee under the Operating Agreement of PJM Interconnection, L.L.C. as in effect immediately prior to the Effective Date shall automatically become a representative to the Members Committee on the Effective Date unless replaced as specified in Section 8.2.4. An entity becoming a Member shall appoint a representative to the Members Committee no later than 30 days after becoming a Member. 8.2.4 CHANGE OF OR SUBSTITUTION FOR A REPRESENTATIVE. Any Member may change its representative or alternate on the Members Committee at any time by providing written notice to the Office of the Interconnection identifying its replacement representative or alternate. Any representative to the Members Committee may, by written notice to the Chair, designate a substitute representative from that Member to act for him or her with respect to any matter specified in such notice. 17 8.3 MEETINGS. 8.3.1 REGULAR AND SPECIAL MEETINGS. The Members Committee shall hold regular meetings, no less frequently than once each calendar quarter at such time and at such place as shall be fixed by the Chair. The Members Committee shall hold an Annual Meeting of the Members each calendar year at such time and place as shall be specified by the Chair. At the Annual Meeting of the Members, Board Members as necessary, officers of the Members Committee, and representatives to the Finance Committee shall be elected. The Members Committee may hold special meetings for one or more designated purposes within the scope of the authority of the Members Committee when called by the Chair on the Chair's own initiative, or at the request of five or more representatives on the Members Committee. The notice of a regular or special meeting shall be distributed to the representatives as specified in Section 18.13 of this Agreement not later than seven days prior to the meeting, shall state the time and place of the meeting, and shall include an agenda sufficient to notify the representatives of the substance of matters to be considered at the meeting; provided, however, that meetings may be called on shorter notice at the discretion of the Chair as the Chair shall deem necessary to deal with an emergency or to meet a deadline for action. 8.3.2 ATTENDANCE. Regular and special meetings may be conducted in person or by telephone, or other electronic means as authorized by the Members Committee. The attendance in person or by telephone or other electronic means of a representative or a duly designated substitute shall be required in order to vote. 8.3.3 QUORUM. The attendance as specified in Section 8.3.2 of a majority of the Voting Members from each of at least three sectors that each have at least five Members shall constitute a quorum, however, a quorum shall only require one- third of the Voting Members, but not less than ten, from any sector that has more than 20 Voting Members. No action may be taken by the Members Committee at a meeting unless a quorum is present; provided, however, that if a quorum is not present, the Voting Members then present shall have the power to adjourn the meeting from time to time until a quorum shall be present. 8.4 MANNER OF ACTING. (a) All matters brought up for a vote or approval by the Members Committee shall be stated in the form of a motion, which must be seconded. Only one motion may be pending at one time. (b) Each Sector shall be entitled to cast one and zero one-hundredths (1.00) Sector Votes. Each Voting Member shall be entitled to cast one (1) non- divisible vote in its sector. In the case of a Voting Member comprised of Affiliates or Related Parties, any representative, alternate or substitute of any of the Affiliated or Related Parties may cast the vote of the Voting Member. The Sector Vote of each sector shall be split into an affirmative component based on votes for the pending motion, and a negative component based on votes against the pending motion, in direct proportion to the votes cast within the sector for and against the pending motion, rounded to two decimal places. (c) The sum of affirmative Sector Votes necessary to pass the pending motion shall be 18 greater than (but not merely equal to) the product of .667 multiplied by the number of sectors that have at least five Members and that participated in the vote. (d) Voting Members not in attendance at the meeting as specified in Section 8.3.2 of this Agreement or abstaining shall not be counted as affirmative or negative votes. 8.5 CHAIR AND VICE CHAIR OF THE MEMBERS COMMITTEE. 8.5.1 SELECTION AND TERM. The representatives or their alternates or substitutes on the Members Committee shall elect from among the representatives a Chair and a Vice Chair. The offices of Chair and Vice Chair shall be held for a term of one year and until succession to the office occurs as specified herein. Except as specified below, at each Annual Meeting of the Members the Vice Chair shall succeed to the office of Chair, and a new Vice Chair shall be elected. If the office of Chair becomes vacant, or the Chair leaves the employment of the Member for whom the Chair is the representative, or the Chair is no longer the representative of such Member, the Vice Chair shall succeed to the office of Chair, and a new Vice Chair shall be elected at the next regular or special meeting of the Members Committee, both such officers to serve until the second Annual Meeting of the Members following such succession or election to a vacant office. If the office of Vice Chair becomes vacant, or the Vice Chair leaves the employment of the Member for whom the Vice Chair is the representative, or the Vice Chair is no longer the representative of such Member, a new Vice Chair shall be elected at the next regular or special meeting of the Members Committee. 8.5.2 DUTIES. The Chair shall call and preside at meetings of the Members Committee, and shall carry out such other responsibilities as the Members Committee shall assign. The Chair shall cause minutes of each meeting of the Members Committee to be taken and maintained, and shall cause notices of meetings of the Members Committee to be distributed. The Vice Chair shall preside at meetings of the Members Committee in the absence of the Chair, and shall otherwise act for the Chair at the Chair's request. 8.6 OTHER COMMITTEES. (a) The Members Committee may form, select the membership, and oversee the activities, of an Operating Committee, a Planning Committee, and an Energy Market Committee as standing committees, and such other committees, subcommittees, task forces, working groups or other bodies as it shall deem appropriate, to provide advice and recommendations to the Members Committee or to the Office of the Interconnection as directed by the Members Committee. (b) The Members Committee shall elect representatives to the Alternate Dispute Resolution Committee as specified in the PJM Dispute Resolution Procedures. 19 8.7 USER GROUPS. (a) Any five or more Members sharing a common interest may form a User Group, and may invite such other Members to join the User Group as the User Group shall deem appropriate. Notification of the formation of a User Group shall be provided to all members of the Members Committee. (b) The Members Committee shall create a User Group composed of representatives of bona fide public interest and environmental organizations that are interested in the activities of the LLC and are willing and able to participate in such a User Group. Meetings of User Groups shall be open to all Members and the Office of the Interconnection. Notices and agendas of meetings of a User Group shall be provided to all Members that ask to receive them. (d) Any recommendation or proposal for action adopted by affirmative vote of three-fourths or more of the members of a User Group shall be circulated by the Office of the Interconnection to the representatives on the Members Committee and shall be considered by the Members Committee at its next regular meeting occurring not earlier than 30 days after the circulation of such notice. (e) If the Members Committee does not adopt a recommendation or proposal submitted to it by a User Group, upon vote of nine-tenths or more of the members of the User Group the recommendation or proposal may be submitted to the PJM Board for its consideration in accordance with Section 7.7(v). 8.8 POWERS OF THE MEMBERS COMMITTEE. The Members Committee, acting by adoption of a motion as specified in Section 8.4, shall have the power to take the actions specified in this Agreement, including: i) Elect the members of the PJM Board; ii) In accordance with the provisions of Section 18.6 of this Agreement, amend any portion of this Agreement, including the Schedules hereto, or create new Schedules, and file any such amendments or new Schedules with FERC or other regulatory body of competent jurisdiction; iii) Terminate this Agreement; and iv) Provide advice and recommendations to the PJM Board and the Office of the Interconnection. 20 9. OFFICERS 9.1 ELECTION AND TERM. The officers of the LLC shall consist of a President, a Secretary and a Treasurer. The PJM Board may elect such other officers as it deems necessary to carry out the business of the LLC. All officers shall be elected by the PJM Board and shall hold office until the next annual meeting of the PJM Board and until their successors are elected. Any number of offices may be held by the same person, except that the offices of the President and Treasurer may not be held by the same person. 9.2 PRESIDENT. The PJM Board shall appoint a President and Chief Executive Officer of the LLC (the "President"). The President shall direct and supervise the day-to-day operation of the LLC, and shall report to the PJM Board. The President shall be responsible for directing and supervising the Office of the Interconnection in the performance of the duties and responsibilities specified in Section 10.4. The President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the LLC, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board to some other officer or agent of the LLC. In the absence of the President or in the event of his or her inability or refusal to act, and if a vice president has been appointed by the PJM Board, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the PJM Board in its Minutes) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice President shall perform such other duties and have such other powers as the PJM Board may from time to time prescribe. 9.3 SECRETARY. The Secretary shall attend all meetings of the PJM Board and record all the proceedings of the meetings of the PJM Board in a minute book to be kept for that purpose and shall perform like duties for the standing committees or special committees when required. He or she shall give, or cause to be given, notice of all special meetings of the PJM Board, and shall perform such other duties as may be prescribed by the PJM Board or President, under whose supervision he or she shall be. He or she shall have custody of the corporate seal of the LLC, and he or she, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and, when so affixed, it may be attested by his or her signature or by the signature of such assistant secretary. The PJM Board may give general authority to any other officer to affix the seal of the LLC and to attest the affixing by his or her signature. 21 9.4 TREASURER. The Treasurer shall have or arrange for the custody of the LLC's funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belongings to the LLC and shall deposit all moneys and other valuable effects in the name and to the credit of the LLC in such depositories as may be designated by the PJM Board. The Treasurer shall disburse the funds of the LLC as may be ordered by the PJM Board, taking proper vouchers for such disbursements, and shall render to the President and PJM Board at its regular meetings, or when the PJM Board so requires, an account of his or her transactions as Treasurer and of the financial condition of the LLC. If required by the Board, the Treasurer shall give the LLC a bond (which shall be renewed periodically) in such sum and with such surety or sureties as shall be satisfactory to the PJM Board for the faithful performance of the duties of his office and of the restoration to the LLC, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the LLC. 9.5 RENEWAL OF OFFICERS; VACANCIES. Any officer elected or appointed by the PJM Board may be removed at any time by the affirmative vote of a majority of the PJM Board eligible to vote. Any vacancy occurring in any office of the LLC shall be filled by the PJM Board. 9.6 COMPENSATION. The salaries of all officers and agents of the LLC, and the reasonable compensation of the PJM Board, shall be fixed by the PJM Board. 10. OFFICE OF THE INTERCONNECTION. 10.1 ESTABLISHMENT. The Office of the Interconnection shall implement this Agreement, administer the PJM Tariff, and undertake such other responsibilities as set forth herein. All personnel of the Office of the Interconnection shall be employees of the LLC or under contract thereto. The cost of the Office of the Interconnection and expenses associated therewith, including salaries and expenses of said personnel, space and any necessary facilities or other capital expenditures, shall be recovered in accordance with Schedule 3. The Office of the Interconnection shall adopt, publish and comply with standards of conduct that satisfy the regulations of FERC. 10.2 PROCESSES AND ORGANIZATION. In order to carry out the responsibilities of the Office of the Interconnection for the safe and reliable operation of the Interconnection, the President may establish processes and organization for operating personnel and facilities as the President shall deem appropriate, and shall request such Members as the President shall deem appropriate to participate in such processes and organization. All such processes and organization shall be carried out in accordance with all applicable code of conduct or other functional separation requirements of FERC. 22 10.3 CONFIDENTIAL INFORMATION. The Office of the Interconnection shall comply with the requirements of Section 18.17 with respect to any proprietary or confidential information received from or about any Member. 10.4 DUTIES AND RESPONSIBILITIES. The Office of the Interconnection, under the direction of the President as supervised and overseen by the PJM Board, shall carry out the following duties and responsibilities, in accordance with the provisions of this Agreement: i) Administer and implement this Agreement; ii) Perform such functions in furtherance of this Agreement as the PJM Board, acting within the scope of its duties and responsibilities under this Agreement, may direct; iii) Prepare, maintain, update and disseminate the PJM Manuals; iv) Comply with MAAC and NERC operation and planning standards, principles and guidelines; v) Maintain an appropriately trained workforce, and such equipment and facilities, including computer hardware and software and backup power supplies, as necessary or appropriate to implement or administer this Agreement; vi) Direct the operation and coordinate the maintenance of the facilities of the Interconnection used for both load and reactive supply, so as to maintain reliability of service and obtain the benefits of pooling and interchange consistent with this Agreement and the Reliability Assurance Agreement; vii) Direct the operation and coordinate the maintenance of the bulk power supply facilities of the Interconnection with such facilities and systems of others not party to this Agreement in accordance with agreements between the LLC and such other systems to secure reliability and continuity of service and other advantages of pooling on a regional basis; viii) Perform interchange accounting and maintain records pertaining to the operation of the PJM Interchange Energy Market and the Interconnection; ix) Notify the Members of the receipt of any application to become a Member, and of the action of the Office of the Interconnection on such application, including but not limited to the completion of integration of a new Member's system into the PJM Control Area as specified in Section 11.6(f); x) Calculate the Weighted Interest of each Member; xi) Maintain accurate records of the sectors in which each Voting Member is entitled to vote, and calculate the results of any vote taken in the Members Committee; 23 xii) Furnish appropriate information and reports as are required to keep the Members regularly informed of the outlook for, the functioning of, and results achieved by the Interconnection; xiii) File with FERC on behalf of the Members any amendments to this Agreement or the Schedules hereto, any new Schedules hereto, and make any other regulatory filings on behalf of the Members or the LLC necessary to implement this Agreement; xiv) At the direction of the PJM Board, submit comments to regulatory authorities on matters pertinent to the Interconnection; xv) Consult with the standing or other committees established pursuant to Section 8.6(a) on matters within the responsibility of the committee; xvi) Perform operating studies of the bulk power supply facilities of the Interconnection and make such recommendations and initiate such actions as may be necessary to maintain reliable operation of the Interconnection; xvii) Accept, on behalf of the Members, notices served under this Agreement; xviii) Perform those functions and undertake those responsibilities transferred to it under the Transmission Owners Agreement, including (A) direct the operation of the transmission facilities of the parties to the Transmission Owners Agreement, (B) administer the PJM Tariff, and (C) administer the Regional Transmission Expansion Planning Protocol set forth as Schedule 6 to this Agreement. xix) Perform those functions and undertake those responsibilities transferred to it under the Reliability Assurance Agreement, as specified in Schedule 8 of this Agreement. xx) Monitor the operation of the PJM Control Area, ensure that appropriate Emergency plans are in place and appropriate Emergency drills are conducted, declare the existence of an Emergency, and direct the operations of the Members as necessary to manage, alleviate or end an Emergency; xxi) Incorporate the grid reliability requirements applicable to nuclear generating units in the PJM Control Area planning and operating principles and practices; and xxii) Initiate such legal or regulatory proceedings as directed by the PJM Board to enforce the obligations of this Agreement. 24 11. MEMBERS 11.1 MANAGEMENT RIGHTS. The Members or any of them shall not take part in the management of the business of, and shall not transact any business for, the LLC in their capacity as Members, nor shall they have power to sign for or to bind the LLC. 11.2 OTHER ACTIVITIES. Except as otherwise expressly provided herein, any Member may engage in or possess any interest in another business or venture of any nature and description, independently or with others, even if such activities compete directly with the business of the LLC, and neither the LLC nor any Member hereof shall have any rights in or to any such independent ventures or the income or profits derived therefrom. 11.3 MEMBER RESPONSIBILITIES. 11.3.1 GENERAL. To facilitate and provide for the work of the Office of the Interconnection and of the several committees appointed by the Members Committee, each Member shall, to the extent applicable ; (a) Maintain adequate records and, subject to the provisions of this Agreement for the protection of the confidentiality of proprietary or commercially sensitive information, provide data required for (i) coordination of operations, (ii) accounting for all interchange transactions, (iii) preparation of required reports, (iv) coordination of planning, including those data required for capacity accounting, (v) preparation of maintenance schedules, (vi) analysis of system disturbances, and (vii) such other purposes, including those set forth in Schedule 2, as will contribute to the reliable and economic operation of the Interconnection; (b) Provide such recording, telemetering, communication and control facilities as are required for the coordination of its operations with the Office of the Interconnection and those of the other Members and to enable the Office of the Interconnection to operate the PJM Control Area and otherwise implement and administer this Agreement, including equipment required in normal and Emergency operations and for the recording and analysis of system disturbances; (c) Provide adequate and properly trained personnel to (i) permit participation in the coordinated operation of the Interconnection, (ii) meet its obligation on a timely basis for supply of records and data, (iii) serve on committees and participate in their investigations, and (iv) share in the representation of the Interconnection in inter-regional and national reliability activities; (d) Share in the costs of committee activities and investigations (including costs of consultants, computer time and other appropriate items), communication facilities used by all the Members (in addition to those provided in the Office of the Interconnection), and such other expenses as are approved for payment by the PJM Board, such costs to be recovered as provided in Schedule 3; 25 (e) Comply with the requirements of the PJM Manuals and all directives of the Office of the Interconnection to take any action for the purpose of managing, alleviating or ending an Emergency, and authorize the Office of the Interconnection to direct the transfer or interruption of the delivery of energy on their behalf to meet an Emergency and to implement agreements with other Control Areas interconnected with the PJM Control Area for the mutual provision of service to meet an Emergency, and be subject to the emergency procedure charges specified in Schedule 9 of this Agreement for any failure to follow the Emergency instructions of the Office of the Interconnection. 11.3.2 FACILITIES PLANNING AND OPERATION. Consistent with and subject to the requirements of this Agreement, the PJM Tariff, the MAAC Agreement, the Reliability Assurance Agreement, the Transmission Owners Agreement, and the PJM Manuals, each Member shall cooperate with the other Members in the coordinated planning and operation of the facilities of its System within the PJM Control Area so as to obtain the greatest practicable degree of reliability, compatible economy and other advantages from such coordinated planning and operation. In furtherance of such cooperation each Member shall, as applicable: (a) Consult with the other Members and the Office of the Interconnection, and coordinate the installation of its electric generation and Transmission Facilities with those of such other Members so as to maintain reliable service in the PJM Control Area; (b) Coordinate with the other Members, the Office of the Interconnection and with others in the planning and operation of the regional facilities to secure a high level of reliability and continuity of service and other advantages; (c) Cooperate with the other Members and the Office of the Interconnection in the implementation of all policies and procedures established pursuant to this Agreement for dealing with Emergencies, including but not limited to policies and procedures for maintaining or arranging for a portion of a Member's Capacity Resources at least equal to the level established pursuant to the Reliability Assurance Agreement to have the ability to go from a shutdown condition to an operating condition and start delivering power without assistance from the power system; (d) Cooperate with the members of MAAC to augment the reliability of the bulk power supply facilities of the region and comply with MAAC and NERC operating and planning standards, principles and guidelines and the PJM Manuals; (e) Obtain or arrange for transmission service as appropriate to carry out this Agreement ; (f) Cooperate with the Office of the Interconnection's coordination of the operating and maintenance schedules of the Member's generating and Transmission Facilities with the facilities of other Members to maintain reliable service to its own customers and those of the other Members and to obtain economic efficiencies consistent therewith; (g) Cooperate with the other Members and the Office of the Interconnection in the analysis, formulation and implementation of plans to prevent or eliminate conditions that 26 impair the reliability of the Interconnection; and (h) Adopt and apply standards adopted pursuant to this Agreement and conforming to MAAC and NERC standards, principles and guidelines and the PJM Manuals, for system design, equipment ratings, operating practices and maintenance practices. 11.3.3 ELECTRIC DISTRIBUTORS. In addition to any of the foregoing responsibilities that may be applicable, each Member that is an Electric Distributor, whether or not that Member votes in the Members Committee in the Electric Distributor sector or meets the eligibility requirements for any other sector of the Members Committee, shall: (a) Accept, comply with or be compatible with all standards applicable within the PJM Control Area with respect to system design, equipment ratings, operating practices and maintenance practices as set forth in the PJM Manuals, or be subject to an interconnected Member's requirements relating to the foregoing, so that sufficient electrical equipment, control capability, information and communication are available to the Office of the Interconnection for planning and operation of the PJM Control Area; (b) Assure the continued compatibility of its local system energy management system monitoring and telecommunications systems to satisfy the technical requirements of interacting automatically or manually with the Office of the Interconnection as it directs the operation of the PJM Control Area; (c) Maintain or arrange for a portion of its connected load to be subject to control by automatic underfrequency, under-voltage, or other load- shedding devices at least equal to the levels established pursuant to the Reliability Assurance Agreement, or be subject to another Member's control for these purposes; (d) Provide or arrange for sufficient reactive capability and voltage control facilities to conform to Good Utility Practice and (i) to meet the reactive requirements of its system and customers and (ii) to maintain adequate voltage levels and the stability required by the bulk power supply facilities of the Interconnection; (e) Shed connected load, share Capacity Resources, initiate active load management programs, and take such other coordination actions as may be necessary in accordance with the directions of the Office of the Interconnection in Emergencies; (f) Maintain or arrange for a portion of its Capacity Resources at least equal to the level established pursuant to the Reliability Assurance Agreement to have the ability to go from a shutdown condition to an operating condition and start delivering power without assistance from the power system; (g) Provide or arrange through another Member for the services of a 24- hour local control center to coordinate with the Office of the Interconnection, each such control center to be furnished with appropriate telemetry equipment as specified in the PJM Manuals, and to be staffed by system operators trained and delegated sufficient authority to take any action necessary to assure that the system for which the operator is responsible is operated in a stable and reliable manner; 27 (h) Provide to the Office of the Interconnection all System, accounting, customer tracking, load forecasting and other data necessary or appropriate to implement or administer this Agreement or the Reliability Assurance Agreement; and (i) Comply with the underfrequency relay obligations and charges specified in Schedule 7 of this Agreement. 11.3.4 REPORTS TO THE OFFICE OF THE INTERCONNECTION. Each Member shall report as promptly as possible to the Office of the Interconnection any changes in its operating practices and procedures relating to the reliability of the bulk power supply facilities of the Interconnection. The Office of the Interconnection shall review such reports, and if any change in an operating practice or procedure of the Member is not in accord with the established operating principles, practices and procedures for the Interconnection and such change adversely affects the Interconnection and regional reliability, it shall so inform such Member, and the other Members through their representative on the Operating Committee, and shall direct that such change be modified to conform to the established operating principles, practices and procedures. 11.4 REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL. The Members shall participate in regional transmission expansion planning in accordance with the Regional Transmission Expansion Planning Protocol set forth in Schedule 6 to this Agreement. 11.5 MEMBER RIGHT TO PETITION. (a) Nothing herein shall deprive any Member of the right to petition FERC to modify any provision of this Agreement or any Schedule or practice hereunder that the petitioning Member believes to be unjust, unreasonable, or unduly discriminatory under Section 206 of the Federal Power Act, subject to the right of any other Member (a) to oppose said proposal, or (b) to withdraw from the LLC pursuant to Section 4.1. (b) Nothing herein shall be construed as affecting in any way the right of the Members, acting pursuant to a vote of the Members Committee as specified in Section 8.4, unilaterally to make an application to FERC for a change in any rate, charge, classification, tariff or service, or any rule or regulation related thereto, under section 205 of the Federal Power Act and pursuant to the rules and regulations promulgated by FERC thereunder, subject to the right of any Member that voted against such change in any rate, charge, classification, tariff or service, or any rule or regulation related thereto, in intervene in opposition to any such application. (c) Nothing in this Agreement shall preclude those Members joining in the proposal to utilize Locational Marginal Prices to deal with transmission congestion from (i) filing amendments to the Agreement necessary to implement the use of Locational Marginal Prices in the PJM Control Area in accordance with such orders or other directives as may be issued by FERC relating thereto, or (ii) implementing the provisions of Sections 1.7.21 and 5.2.2(d) of Schedule 1 to this Agreement, without further authorization or approval by the Members Committee. 28 11.6 MEMBERSHIP REQUIREMENTS. (a) To qualify as a Member, an entity shall: i) Be a Transmission Owner within the PJM Control Area or an Eligible Customer under the PJM Tariff; ii) If not a Transmission Owner, be a Generation Owner, an Other Supplier, an Electric Distributor, or an End-Use Consumer; iii) Be engaged in buying, selling or transmitting electric energy in or through the Interconnection or have a good faith intent to do so; and iv) Accept the obligations set forth in this Agreement. (b) Certain Members that are Load Serving Entities are parties to the Reliability Assurance Agreement. Upon becoming a Member, any entity that is a Load Serving Entity and that wishes to become a Market Buyer shall also simultaneously execute the Reliability Assurance Agreement . (c) An entity that wishes to become a party to this Agreement shall apply, in writing, to the President setting forth its request, its qualifications for membership, its agreement to supply data as specified in this Agreement, its agreement to pay all costs and expenses in accordance with Schedule 3, and providing all information specified pursuant to the Schedules to this Agreement for entities that wish to become Market Participants. Any such application that meets all applicable requirements shall be approved by the President within sixty (60) days. (d) Nothing in this Section 11 is intended to remove, in any respect, the choice of participation by other utility companies or organizations in the operation of the Interconnection through inclusion in the System of a Member. (e) An entity whose application is accepted by the President pursuant to Section 11.6(c) shall execute a supplement to this Agreement in substantially the form prescribed in Schedule 4, which supplement shall be countersigned by the President and tendered for filing with FERC by the President. The entity shall become a Member effective on the date specified by FERC when accepting the supplement for filing. (f) Entities whose applications contemplate expansion or rearrangement of the PJM Control Area may become Members promptly as described in Sections 11.6(c) and 11.6(e) above, but the integration of the applicant's system into all of the operation and accounting provisions of this Agreement and the Reliability Assurance Agreement shall occur only after completion of all required installations and modifications of metering, communications, computer programming, and other necessary and appropriate facilities and procedures, as determined by the Office of the Interconnection. The Office of the Interconnection shall notify the other Members when such integration has occurred. 29 12. TRANSFERS OF MEMBERSHIP INTEREST The rights and obligations created by this Agreement shall inure to and bind the successors and assigns of such Member; provided, however, that the rights and obligations of any Member hereunder shall not be assigned without the approval of the Members Committee except as to a successor in operation of a Member's electric operating properties by reason of a merger, consolidation, reorganization, sale, spinoff, or foreclosure, as a result of which substantially all such electric operating properties are acquired by such a successor, and such successor becomes a Member. 13. INTERCHANGE 13.1 INTERCHANGE ARRANGEMENTS WITH NON-MEMBERS. Any Member may enter into interchange arrangements with others who are not Members with respect to the delivery or receipt of capacity and energy to fulfill its obligations hereunder or for any other purpose, subject to the standards and requirements established in or pursuant to this Agreement. 13.2 ENERGY MARKET. The Office of the Interconnection shall administer an efficient energy market within the Interconnection, to be known as the PJM Interchange Energy Market, in which Members may buy and sell energy. The Office of the Interconnection will schedule in advance and dispatch generation on the basis of least-cost, security-constrained dispatch and the prices and operating characteristics offered by sellers within and into the Interconnection, continuing until sufficient generation is dispatched to serve the energy purchase requirements of the Interconnection and buyers out of the Interconnection, as well as the requirements of the Interconnection for ancillary services provided by such generation. Scheduling and dispatch shall be conducted in accordance with applicable schedules to the PJM Tariff and the Schedules to this Agreement. 14. METERING 14.1 INSTALLATION, MAINTENANCE AND READING OF METERS. The quantities of electric energy involved in determination of the amounts of the billing rendered hereunder shall be ascertained by means of meters installed, maintained and read either at the expense of the party on whose premises the meters are located or as otherwise provided for by agreement between the parties concerned. 14.2 METERING PROCEDURES. Procedures with respect to maintenance, testing, calibrating, correction and registration records, and precision tolerance of all metering equipment shall be in accordance with Good Utility Practice. The expense of testing any meter shall be borne by the party owning such meter, except that when a meter tested upon request of another party is found to register within the established tolerance the party making the request shall bear the expense of such test. 30 14.3 INTEGRATED MEGAWATT-HOURS All metering of energy required herein shall be the integration of megawatt hours in the clock hour, and the quantities thus obtained shall constitute the megawatt load for such clock hour; provided, however, that adjustment shall be made for other contractual obligations of any Member as may be required to determine the quantity to be accounted for hereunder, and for transmission losses. 14.4 METER LOCATIONS. The meter locations to be used by the Members in determining their energy transactions on the Interconnection shall be as reasonably determined from time to time by the Member or the Office of the Interconnection. 15. ENFORCEMENT OF OBLIGATIONS 15.1 FAILURE TO MEET OBLIGATIONS. 15.1.1 TERMINATION OF MARKET BUYER RIGHTS. The Office of the Interconnection shall terminate a Market Buyer's right to make purchases from the PJM Interchange Energy Market if it determines that the Market Buyer does not continue to meet the obligations set forth in this Agreement, provided that the Office of the Interconnection has notified the Market Buyer of any such deficiency and afforded the Market Buyer a reasonable opportunity to cure it. The Office of the Interconnection shall reinstate a Market Buyer's right to make purchases from the PJM Interchange Energy Market upon demonstration by the Market Buyer that it has come into compliance with the obligations set forth in this Agreement. 15.1.2 TERMINATION OF MARKET SELLER RIGHTS. The Office of the Interconnection shall not accept offers from a Market Seller that has not complied with the prices, terms, or operating characteristics of any of its prior scheduled transactions in the PJM Interchange Energy Market, unless such Market Seller has taken appropriate measures to the satisfaction of the Office of the Interconnection to ensure future compliance. 31 15.1.3 PAYMENT OF BILLS. (a) A Member shall make full and timely payment, in accordance with the terms specified by the Office of the Interconnection, of all bills rendered in connection with transactions in the PJM Interchange Energy Market or other services performed by the Office of the Interconnection, notwithstanding any disputed amount, but any such payment shall not be deemed a waiver of any right with respect to such dispute. Any Member that fails to make such payment, or otherwise fails to meet its financial or other obligations to a Member, the Office of the Interconnection or the LLC under this Agreement, shall upon expiration of the 30 day period specified below be in default. If the Office of the Interconnection concludes, upon its own initiative or the recommendation of or complaint by the Members Committee or any Member, that a Member is in breach of any obligation under this Agreement, the Office of the Interconnection shall so notify such Member and inform all other Members. The notified Member may remedy such asserted breach by: (i) paying all amounts assertedly due, along with interest on such amounts calculated in accordance with the methodology specified for interest on refunds in FERC's regulations at 18 C.F.R. (S) 35.19a(a)(2)(iii); and (ii) demonstration to the satisfaction of the Office of the Interconnection that the Member has taken appropriate measures to meet any other obligation of which it was deemed to be in breach; provided, however, that any such payment or demonstration may be subject to a reservation of rights, if any, to subject such matter to the PJM Dispute Resolution Procedures; and provided, further, that any such determination by the Office of the Interconnection may be subject to review by the PJM Board upon request of the Member involved or the Office of the Interconnection. If a Member has not remedied a breach by the 30th day following receipt of the Office of the Interconnection's notice, or receipt of the PJM Board's decision on review, if applicable, then the Member shall be in default and, in addition to such other remedies as may be available to the LLC: i) A defaulting Market Participant shall be precluded from buying or selling energy in the PJM Interchange Energy Market until the default is remedied as set forth above. ii) A defaulting Member shall not be entitled to participate in the activities of any committee or other body established by the Members Committee or the Office of the Interconnection. iii) A defaulting Member shall not be entitled to vote on the Members Committee or any other committee or other body established pursuant to this Agreement. 32 15.2 ENFORCEMENT OF OBLIGATIONS. If the Office of the Interconnection sends a notice to the PJM Board that a Member has failed to perform an obligation under this Agreement, the PJM Board shall initiate such action against such Member to enforce such obligation as the PJM Board shall deem appropriate. Subject to the procedures specified in Section 15.1, a Member's failure to perform such obligation shall be deemed to be a default under this Agreement. In order to remedy a default, but without limiting any rights the LLC may have against the defaulting Member, the PJM Board may assess against, and collect from, the Members not in default, in proportion to their Weighted Interest, an amount equal to the amount that the defaulting Member has failed to pay to the Office of the Interconnection, along with appropriate interest, but such assessment shall in no way relieve the defaulting Member of its obligations, and shall confer upon the Members Committee the right to recover the assessed amounts from the defaulting Member. In addition to any amounts in default, the defaulting Member shall be liable to the LCC for reasonable costs incurred in enforcing the defaulting Member's obligations. 15.3 OBLIGATIONS TO A MEMBER IN DEFAULT. The Members have no continuing obligation to provide the benefits of interconnected operations to a Member in default. 15.4 OBLIGATIONS OF A MEMBER IN DEFAULT. A Member found to be in default shall take all possible measures to mitigate the continued impact of the default on the Members not in default, including, but not limited to, loading its own generation to supply its own load to the maximum extent possible. 15.5 NO IMPLIED WAIVER. A failure of a Member, the PJM Board, or the LLC to insist upon or enforce strict performance of any of the provisions of this Agreement shall not be construed as a waiver or relinquishment to any extent of such entity's right to assert or rely upon any such provisions, rights and remedies in that or any other instance; rather, the same shall be and remain in full force and effect . 33 16. LIABILITY AND INDEMNITY 16.1 MEMBERS. (a) As between the Members, except as may be otherwise agreed upon between individual Members with respect to specified interconnections, each Member will indemnify and hold harmless each of the other Members, and its directors, officers, employees, agents, or representatives, of and from any and all damages, losses, claims, demands, suits, recoveries, costs and expenses (including all court costs and reasonable attorneys' fees), caused by reason of bodily injury, death or damage to property of any third party, resulting from or attributable to the fault, negligence or willful misconduct of such Member, its directors, officers, employees, agents, or representatives, or resulting from, arising out of, or in any way connected with the performance of its obligations under this Agreement, excepting only, and to the extent, such cost, expense, damage, liability or loss may be caused by the fault, negligence or willful misconduct of any other Member. The duty to indemnify under this Agreement will continue in full force and effect notwithstanding the expiration or termination of this Agreement or the withdrawal of a Member from this Agreement, with respect to any loss, liability, damage or other expense based on facts or conditions which occurred prior to such termination or withdrawal. (b) The amount of any indemnity payment arising hereunder shall be reduced (including, without limitation, retroactively) by any insurance proceeds or other amounts actually recovered by the Member seeking indemnification in respect of the indemnified action, claim, demand, costs, damage or liability. If any Member shall have received an indemnity payment for an action, claim, demand, cost, damage or liability and shall subsequently actually receive insurance proceeds or other amounts for such action, claim, demand, cost, damage or liability, then such Member shall pay to the Member that made such indemnity payment the lesser of the amount of such insurance proceeds or other amounts actually received and retained or the net amount of the indemnity payments actually received previously. 34 16.2 LLC INDEMNIFIED PARTIES. (a) The LLC will indemnify and hold harmless the PJM Board, the LLC's officers, employees and agents, and any representatives of the Members serving on the Members Committee and any other committee created under Section 8 of this Agreement (all such Board Members, officers, employees, agents and representatives for purposes of this Section 16 being referred to as "LLC Indemnified Parties"), of and from any and all actions, claims, demands, costs (including consequential or indirect damages, economic losses and all court costs and reasonable attorneys' fees) and liabilities to any third parties, arising from, or in any way connected with, the performance of the LLC under this Agreement, or the fact that such LLC Indemnified Party was serving in such capacity, except to the extent that such action, claim, demand, cost or liability results from the willful misconduct of any LLC Indemnified Party with respect to participation in the misconduct. To the extent any dispute arises between any Member and the LLC arising from, or in any way connected with, the performance of the LLC under this Agreement, the Member and the LLC shall follow the PJM Dispute Resolution Procedures. To the extent that any such action, claim, demand, cost or liability arises from a Member's contractual or other obligation to provide electric service directly or indirectly to said third party, which obligation to provide service is limited by the terms of any tariff, service agreement, franchise, statute, regulatory requirement, court decision or other limiting provision, the Member designates the LLC and each LLC Indemnified Party a beneficiary of said limitation. (b) An LLC Indemnified Party shall not be personally liable for monetary damages for any breach of fiduciary duty by such LLC Indemnified Party, except that an LLC Indemnified Party shall be liable to the extent provided by applicable law (i) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, or (ii) for any transaction from which the LLC Indemnified Party derived an improper personal benefit. Notwithstanding (i) and (ii), indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the LLC if and to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. If applicable law is hereafter construed or amended to authorize the further elimination or limitation of the liability of LLC Indemnified Parties, then the liability of the LLC Indemnified Parties, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by law. No amendment to or repeal of this section shall apply to or have any effect on the liability or alleged liability of any LLC Indemnified Party or with respect to any acts or omissions occurring prior to such amendment or repeal. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the LLC, and with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. (c) The LLC may pay expenses incurred by an LLC Indemnified Party in defending a civil, criminal, administrative or investigative action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of 35 such LLC Indemnified Party to repay such amount if it shall ultimately be determined that such LLC Indemnified Party is not entitled to be indemnified by the LLC as authorized in this Section. (d) In the event the LLC incurs liability under this Section 16.2 that is not adequately covered by insurance, such amounts shall be recovered pursuant to the PJM Tariff as provided in Schedule 3 of this Agreement. 16.3 WORKER' COMPENSATION CLAIMS. Each Member shall be solely responsible for all claims of its own employees, agents and servants growing out of any Worker's Compensation Law. 16.4 LIMITATION OF LIABILITY. No Member or its directors, officers, employees, agents, or representatives shall be liable to any other Member or its directors, officers, employees, agents, or representatives, whether liability arises out of contract, tort (including negligence), strict liability, or any other cause of or form of action whatsoever, for any indirect, incidental, consequential, special or punitive cost, expense, damage or loss, including but not limited to loss of profits or revenues, cost of capital of financing, loss of goodwill or cost of replacement power, arising from such Member's performance or failure to perform any of its obligations under this Agreement or the ownership, maintenance or operation of its System; provided, however, that nothing herein shall be deemed to reduce or limit the obligations of any Member with respect to the claims of persons or entities that are not parties to this Agreement. 16.5 RESOLUTION OF DISPUTES. To the extent any dispute arises between one or more Members regarding any issue covered by this Agreement, the Members shall follow the dispute resolution procedures set forth in the PJM Dispute Resolution Procedures. 16.6 GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Neither the LLC nor the LLC Indemnified Parties shall be liable to the Members or any of them for any claims, demands or costs arising from, or in any way connected with, the performance of the LLC under this Agreement other than actions, claims or demands based on gross negligence or willful misconduct; provided, however, that nothing herein shall limit or reduce the obligations of the LLC to the Members or any of them under the express terms of this Agreement or the PJM Tariff, including, but not limited to, those set forth in Sections 6.2 and 6.3 of this Agreement. 16.7 INSURANCE. The PJM Board shall be authorized to procure insurance against the risks borne by the LLC and the LLC Indemnified Parties, the cost of which shall be treated as a cost and expense of the LLC. 36 17. MEMBER REPRESENTATIONS, WARRANTIES AND COVENANTS 17.1 REPRESENTATIONS AND WARRANTIES. Each Member makes the following representations and warranties to the LLC and each other Member, as of the Effective Date or such later date as such Member shall become admitted as a Member of the LLC. 17.1.1 ORGANIZATION AND EXISTENCE. Such Member is an entity duly organized, validly existing and in good standing under the laws of the state of its organization. 17.1.2 POWER AND AUTHORITY. Such Member has the full power and authority to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby. 17.1.3 AUTHORIZATION AND ENFORCEABILITY. The execution and delivery of this Agreement by such Member and the performance of its obligations hereunder have been duly authorized by all requisite action on the part of the Member, and do not conflict with any applicable law or with any other agreement binding upon the Member. The Agreement has been duly executed and delivered by such Member and constitutes the legal, valid and binding obligation of such Member, enforceable against it in accordance with the terms thereof, except insofar as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and to general principles of equity whether such principles are considered in proceedings in law or in equity. 17.1.4 NO GOVERNMENT CONSENTS. No authorization, consent, approval or order of, notice to or registration, qualification, declaration or filing with, any governmental authority is required for the execution, delivery and performance by such Member of this Agreement or the carrying out by such Member of the transactions contemplated hereby other than such authorization, consent, approval or order of, notice to or registration, qualification, declaration or filing that is pending before such governmental authority. 17.1.5 NO CONFLICT OR BREACH. None of the execution, delivery and performance by such Member of this Agreement, the compliance with the terms and provisions hereof and the carrying out of the transactions contemplated hereby, conflicts or will conflict with or will result in a breach or violation of any of the terms, conditions or provisions of any law, governmental rule or regulation or the charter documents or bylaws of such Member or any applicable order, writ, injunction, judgment or decree of any court or governmental authority against such Member or by which it or any of its properties, is bound, or any loan agreement, indenture, mortgage, bond, note, resolution, contract or other agreement or instrument to which such Member is a party or by which it or any of its properties is bound, or constitutes or will constitute a default thereunder or will result in the imposition of any lien upon any of its properties. 37 17.1.6 NO PROCEEDINGS. There are no actions at law, suits in equity, proceedings or claims pending or, to the knowledge of the Member, threatened against the Member before any federal, state, foreign or local court, tribunal or government agency or authority that might materially delay, prevent or hinder the performance by the Member of its obligations hereunder. 17.2 MUNICIPAL ELECTRIC SYSTEMS. Any provisions of Section 17.1 notwithstanding, if any Member that is a municipal electric system believes in good faith that the provisions of Sections 5.1(b) and 16.1 of this Agreement may not lawfully be applied to that Member under applicable state law governing municipal activities, the Member may request a waiver of the pertinent provisions of the Agreement. Any such request for waiver shall be supported by an opinion of counsel for the Member to the effect that the provision of the Agreement as to which waiver is sought may not lawfully be applied to the Member under applicable state law. The PJM Board shall have the right to have the opinion of the Member's counsel reviewed by counsel to the LLC. If the PJM Board concludes that either or both of Sections 5.1(b) and 16.1 of this Agreement may not lawfully be applied to a municipal electric system Member, it shall waive the application of the affected provision or provisions to such municipal Member. Any Member not permitted by law to indemnify the other Members shall not be indemnified by the other Members. 17.3 SURVIVAL. All representations and warranties contained in this Section 17 shall survive the execution and delivery of this Agreement . 18. MISCELLANEOUS PROVISIONS 18.1 [RESERVED.] 18.2 FISCAL AND TAXABLE YEAR. The fiscal year and taxable year of the LLC shall be the calendar year. 18.3 REPORTS. Each year prior to the Annual Meeting of the Members, the PJM Board shall cause to be prepared and distributed to the Members a report of the LLC's activities since the prior report. 38 18.4 BANK ACCOUNTS; CHECKS, NOTES AND DRAFTS. (a) Funds of the LLC shall be deposited in an account or accounts of a type, in form and name and in a bank(s) or other financial institution(s) which are participants in federal insurance programs as selected by the PJM Board. The PJM Board shall arrange for the appropriate conduct of such accounts. Funds may be withdrawn from such accounts only for bona fide and legitimate LLC purposes and may from time to time be invested in such short-term securities, money market funds, certificates of deposit or other liquid assets as the PJM Board deems appropriate. All checks or demands for money and notes of the LLC shall be signed by any officer or by any other person designated by the PJM Board. (b) The Members acknowledge that the PJM Board may maintain LLC funds in accounts, money market funds, certificates of deposit, other liquid assets in excess of the insurance provided by the Federal Deposit Insurance Corporation, or other depository insurance institutions and that the PJM Board shall not be accountable or liable for any loss of such funds resulting from failure or insolvency of the depository institution. (c) Checks, notes, drafts and other orders for the payment of money shall be signed by such persons as the PJM Board from time to time may authorize. When the PJM Board so authorizes, the signature of any such person may be a facsimile. 18.5 BOOKS AND RECORDS. (a) At all times during the term of the LLC, the PJM Board shall keep, or cause to be kept, full and accurate books of account, records and supporting documents, which shall reflect, completely, accurately and in reasonable detail, each transaction of the LLC. The books of account shall be maintained and tax returns prepared and filed on the method of accounting determined by the PJM Board. The books of account, records and all documents and other writings of the LLC shall be kept and maintained at the principal office of the Interconnection. (b) The PJM Board shall cause the Office of the Interconnection to keep at its principal office the following: i) A current list in alphabetical order of the full name and last known business address of each Member, the Weighted Interest of each Member, and the Members Committee sector of each Voting Member; ii) A copy of the Certificate of Formation and the Certificate of Conversion, and all Certificates of Amendment thereto; iii) Copies of the LLC's federal, state, and local income tax returns and reports, if any, for the three most recent years; and iv) Copies of the Operating Agreement, as amended, and of any financial statements of the LLC for the three most recent years. 39 18.6 AMENDMENT. (a) Except as provided by law or otherwise set forth herein, this Agreement, including any Schedule hereto, may be amended, or a new Schedule may be created, only upon: (i) submission of the proposed amendment to the PJM Board for its review and comments; (ii) approval of the amendment or new Schedule by the Members Committee, after consideration of the comments of the PJM Board, in accordance with Section 8.4, or written agreement to an amendment of all Members not in default at the time the amendment is agreed upon; and (iii) approval and/or acceptance for filing of the amendment by FERC and any other regulatory body with jurisdiction thereof as may be required by law. If and as necessary, the Members Committee may file with FERC or other regulatory body of competent jurisdiction any amendment to this Agreement or to its Schedules or a new Schedule not filed by the Office of the Interconnection. (b) Notwithstanding the foregoing, an applicant eligible to become a Member in accordance with the procedures specified in this Agreement shall become a Member by executing a counterpart of this Agreement without the need for amendment of this Agreement or execution of such counterpart by any other Member. (c) Each of the following fundamental changes to the LLC shall require or be deemed to require an amendment to this Agreement and shall require the prior approval of FERC: i) Adoption of any plan of merger or consolidation; ii) Adoption of any plan of sale, lease or exchange of assets relating to all, or substantially all, of the property and assets of the LLC; iii) Adoption of any plan of division relating to the division of the LLC into two or more corporations or other legal entities; iv) Adoption of any plan relating to the conversion of the LLC into a stock corporation; v) Adoption of any proposal of voluntary dissolution; or vi) Taking any action which has the purpose or effect of the adoption of any plan or proposal described in items (i), (ii), (iii), (iv) or (v) above. 18.7 INTERPRETATION. Wherever the context may require, any noun or pronoun used herein shall include the corresponding masculine, feminine or neuter forms. The singular form of nouns, pronouns and verbs shall include the plural and vice versa. 18.8 SEVERABILITY. Each provision of this Agreement shall be considered severable and if for any reason any provision is determined by a court or regulatory authority of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions of this Agreement shall continue in full force and effect and shall in no way be affected, impaired or invalidated, and such invalid, void or unenforceable provision shall be replaced with valid and enforceable provision or provisions which otherwise give effect to the original intent of the invalid, void or unenforceable provision. 40 18.9 FORCE MAJEURE. No Member shall be liable to any other Member for damages or otherwise be in breach of this Agreement to the extent and during the period such Member's performance is prevented by any cause or causes beyond such Member's control and without such Member's fault or negligence, including but not limited to any act, omission, or circumstance occasioned by or in consequence of any act of God, labor disturbance, act of the public enemy, war, insurrection, riot, fire, storm or flood, explosion, breakage or accident to machinery or equipment, or curtailment, order, regulation or restriction imposed by governmental, military or lawfully established civilian authorities; provided, however, that any such foregoing event shall not excuse any payment obligation. Upon the occurrence of an event considered by a Member to constitute a force majeure event, such Member shall use due diligence to endeavor to continue to perform its obligations as far as reasonably practicable and to remedy the event, provided that no Member shall be required by this provision to settle any strike or labor dispute. 18.10 FURTHER ASSURANCES. Each Member hereby agrees that it shall hereafter execute and deliver such further instruments, provide all information and take or forbear such further acts and things as may be reasonably required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the terms hereof. 18.11 SEAL. The seal of the LLC shall have inscribed thereon the name of the LLC, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 18.12 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together will constitute one instrument, binding upon all parties hereto, notwithstanding that all of such parties may not have executed the same counterpart. 18.13 COSTS OF MEETINGS. Each Member shall be responsible for all costs of its representative, alternate or substitute in attending any meeting. The Office of the Interconnection shall pay the other reasonable costs of meetings of the PJM Board and the Members Committee, and such other committees, subcommittees, task forces, working groups, User Groups or other bodies as determined to be appropriate by the Office of the Interconnection, which costs otherwise shall be paid by the Members attending. The Office of the Interconnection shall reimburse all Board Members for their reasonable costs of attending meetings. 41 18.14 NOTICE. (a) Except as otherwise expressly provided herein, notices required under this Agreement shall be in writing and shall be sent to a Member by overnight courier, hand delivery, telecopier or other reliable electronic means to the representative on the Members Committee of such Member at the address for such Member previously provided by such Member to the other Members or as otherwise directed by the Members Committee. Any such notice so sent shall be deemed to have been given (i) upon delivery if given by overnight couriers or hand delivery, or (ii) upon confirmation if given by telecopier or other reliable electronic means. (b) Notices, as well as copies of the agenda and minutes of all meetings of committees, subcommittees, task forces, working groups, User Groups, or other bodies formed under this Agreement, shall be posted in a timely fashion on and made available for downloading from the PJM website. 18.15 HEADINGS. The section headings used in this Agreement are for convenience only and shall not affect the construction or interpretation of any of the provisions of this Agreement. 18.16 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended to be solely for the benefit of the Members and their respective successors and permitted assigns and, unless expressly stated herein, is not intended to and shall not confer any rights or benefits on any third party (other than successors and permitted assigns) not a signatory hereto. 18.17 CONFIDENTIALITY. 18.17.1 PARTY ACCESS. No Member shall have a right hereunder to receive or review any documents, data or other information of another Member, including documents, data or other information provided to the Office of the Interconnection, to the extent such documents, data or information have been designated as confidential pursuant to the procedures adopted by the Office of the Interconnection or to the extent that they have been designated as confidential by such other Member; provided, however, a Member may receive and review any composite documents, data and other information that may be developed based on such confidential documents, data or information if the composite does not disclose any individual Member's confidential data or information. 42 18.17.2 REQUIRED DISCLOSURE. (a) Notwithstanding anything in the foregoing Section to the contrary, if a Member or the Office of the Interconnection is required by applicable law, or in the course of administrative or judicial proceedings, to disclose information that is otherwise required to be maintained in confidence pursuant to this Agreement, that Member or the Office of the Interconnection may make disclosure of such information; provided, however, that as soon as the Member or the Office of the Interconnection learns of the disclosure requirement and prior to making disclosure, that Member or the Office of the Interconnection shall notify the affected Member or Members of the requirement and the terms thereof and the affected Member or Members may direct, at their sole discretion and cost, any challenge to or defense against the disclosure requirement. The disclosing Member and the Office of the Interconnection shall cooperate with such affected Members to the maximum extent practicable to minimize the disclosure of the information consistent with applicable law. Each Member and the Office of the Interconnection shall cooperate with the affected Members to obtain proprietary or confidential treatment of such information by the person to whom such information is disclosed prior to any such disclosure. (b) The Office of the Interconnection shall endeavor to impose on any contractors retained to provide technical support or otherwise to assist with the implementation or administration of this Agreement a contractual duty of confidentiality consistent with this Agreement. A Member shall not be obligated to provide confidential or proprietary information to any contractor that does not assume such a duty of confidentiality, and the Office of the Interconnection shall not provide any such information to any such contractor without the express written permission of the Member providing the information. 18.18 TERMINATION AND WITHDRAWAL. 18.18.1 TERMINATION. Upon termination of this Agreement, final settlement for obligations under this Agreement shall include the accounting for the period ending with the last day of the last month for which the Agreement was effective. 18.18.2 WITHDRAWAL. Subject to the requirements of Section 4.1(c) of this Agreement and Section 1.4.6 of the Schedule 1 to this Agreement, any Member may withdraw from this Agreement upon 90 days notice to the Office of the Interconnection. 43 18.18.3 WINDING UP. Any provision of this Agreement that expressly or by implication comes into or remains in force following the termination or expiration of this Agreement shall survive such termination or expiration. The surviving provisions shall include, but shall not be limited to: (i) those provisions necessary to permit the orderly conclusion, or continuation pursuant to another agreement, of transactions entered into prior to the decision to terminate this Agreement, (ii) those provisions necessary to conduct final billing, collection, and accounting with respect to all matters arising hereunder, and (iii) the indemnification provisions as applicable to periods prior to such termination or expiration. IN WITNESS whereof, the Members have caused this Agreement to be executed by their duly authorized representatives. 44 SCHEDULE 1 PJM INTERCHANGE ENERGY MARKET (Revises and replaces former Schedules 7.01 and 7.03) Issued: June 2, 1997 Effective: April 1, 1998 1. MARKET OPERATIONS 1.1 INTRODUCTION. This Schedule sets forth the scheduling, other procedures, and certain general provisions applicable to the operation of the PJM Interchange Energy Market within the PJM Control Area. This Schedule addresses each of the three time-frames pertinent to the daily operation of the PJM Interchange Energy Market: Prescheduling, Scheduling, and Dispatch. 1.2 COST-BASED OFFERS. Unless and until the FERC shall authorize the use of market-based prices in the PJM Interchange Energy Market, all offers for energy or other services to be sold on the PJM Interchange Energy Market from generating resources located within the PJM Control Area shall not exceed the variable cost of producing such energy or other service, as determined in accordance with Schedule 2 to this Agreement and applicable regulatory standards, requirements and determinations; provided that, a Market Seller may offer to the PJM Interchange Energy Market the right to call on energy from a resource the output of which has been sold on a bilateral basis, with the rate for such energy if called equal to the curtailment rate specified in the bilateral contract. 1.3 DEFINITIONS. 1.3.1 DISPATCH RATE. "Dispatch Rate" shall mean the control signal, expressed in dollars per megawatt-hour, calculated and transmitted continuously and dynamically to direct the output level of all generation resources dispatched by the Office of the Interconnection in accordance with the Offer Data. 1.3.2 EQUIVALENT LOAD. "Equivalent Load" shall mean the sum of a Market Participant's net system requirements to serve its customer load in the PJM Control Area, if any, plus its net bilateral transactions. 1.3.3 EXTERNAL MARKET BUYER. "External Market Buyer" shall mean a Market Buyer making purchases of energy from the PJM Interchange Energy Market for consumption by end-users outside the PJM Control Area, or for load in the Control Area that is not served by Network Transmission Service. 45 1.3.4 EXTERNAL RESOURCE. "External Resource" shall mean a generation resource located outside the metered boundaries of the PJM Control Area. 1.3.5 FIXED TRANSMISSION RIGHT. "Fixed Transmission Right" shall mean a number determined as specified in Section 5.2.2 of this Schedule. 1.3.6 GENERATING MARKET BUYER. "Generating Market Buyer" shall mean an Internal Market Buyer that is a Load Serving Entity that owns or has contractual rights to the output of generation resources capable of serving the Market Buyer's load in the PJM Control Area, or of selling energy or related services in the PJM Interchange Energy Market or elsewhere. 1.3.7 GENERATOR FORCED OUTAGE. "Generator Forced Outage" shall mean an immediate reduction in output or capacity or removal from service, in whole or in part, of a generating unit by reason of an Emergency or threatened Emergency, unanticipated failure, or other cause beyond the control of the owner or operator of the facility, as specified in the relevant portions of the PJM Manuals. A reduction in output or removal from service of a generating unit in response to changes in market conditions shall not constitute a Generator Forced Outage. 1.3.8 GENERATOR MAINTENANCE OUTAGE. "Generator Maintenance Outage" shall mean the scheduled removal from service, in whole or in part, of a generating unit in order to perform necessary repairs on specific components of the facility, if removal of the facility meets the guidelines specified in the PJM Manuals. 1.3.9 GENERATOR PLANNED OUTAGE. "Generator Planned Outage" shall mean the scheduled removal from service, in whole or in part, of a generating unit for inspection, maintenance or repair with the approval of the Office of the Interconnection in accordance with the PJM Manuals. 1.3.10 INTERNAL MARKET BUYER. "Internal Market Buyer" shall mean a Market Buyer making purchases of energy from the PJM Interchange Energy Market for ultimate consumption by end- users inside the PJM Control Area that are served by Network Transmission Service. 1.3.11 INADVERTENT INTERCHANGE. "Inadvertent Interchange" shall mean the difference between net actual energy flow and net scheduled energy flow into or out of the PJM Control Area, as determined and allocated each hour by the Office of the Interconnection in accordance with the procedures set forth in the PJM Manuals to each Electric Distributor that reports to the Office of the Interconnection its hourly net energy flows from metered tie lines. 2 1.3.12 MARKET OPERATIONS CENTER. "Market Operations Center" shall mean the equipment, facilities and personnel used by or on behalf of a Market Participant to communicate and coordinate with the Office of the Interconnection in connection with transactions in the PJM Interchange Energy Market or the operation of the PJM Control Area. 1.3.13 MAXIMUM GENERATION EMERGENCY. "Maximum Generation Emergency" shall mean an Emergency declared by the Office of the Interconnection in which the Office of the Interconnection anticipates requesting one or more Capacity Resources to operate at its maximum net or gross electrical power output, subject to the equipment stress limits for such Capacity Resource, in order to manage, alleviate, or end the Emergency. 1.3.14 MINIMUM GENERATION EMERGENCY. "Minimum Generation Emergency" shall mean an Emergency declared by the Office of the Interconnection in which the Office of the Interconnection anticipates requesting one or more generating resources to operate at or below Normal Minimum Generation, in order to manage, alleviate, or end the Emergency. 1.3.14A NERC INTERCHANGE DISTRIBUTION CALCULATOR. "NERC Interchange Distribution Calculator" shall mean the NERC mechanism that is in effect and being used to calculate the distribution of energy, over specific transmission interfaces, from energy transactions. 1.3.15 NETWORK RESOURCE. "Network Resource" shall have the meaning specified in the PJM Tariff. 1.3.16 NETWORK SERVICE USER. "Network Service User" shall mean an entity using Network Transmission Service. 1.3.17 NETWORK TRANSMISSION SERVICE. "Network Transmission Service" shall mean transmission service provided pursuant to the rates, terms and conditions set forth in Part III of the PJM Tariff, or transmission service comparable to such service that is provided to a Load Serving Entity that is also a Regional Transmission Owner as that term is defined in the PJM Tariff. 1.3.18 NORMAL MAXIMUM GENERATION. "Normal Maximum Generation" shall mean the highest output level of a generating resource under normal operating conditions. 1.3.19 NORMAL MINIMUM GENERATION. "Normal Minimum Generation" shall mean the lowest output level of a generating resource under normal operating conditions. 1.3.20 OFFER DATA. "Offer Data" shall mean the scheduling, operations planning, dispatch, new resource, and other data and information necessary to schedule and dispatch generation resources for the provision of energy and other services and the maintenance of the reliability and security of the transmission system in the PJM Control Area, and specified for submission to the PJM Interchange Energy Market for such purposes by the Office of the Interconnection. 3 1.3.21 OFFICE OF THE INTERCONNECTION CONTROL CENTER. "Office of the Interconnection Control Center" shall mean the equipment, facilities and personnel used by the Office of the Interconnection to coordinate and direct the operation of the PJM Control Area and to administer the PJM Interchange Energy Market, including facilities and equipment used to communicate and coordinate with the Market Participants in connection with transactions in the PJM Interchange Energy Market or the operation of the PJM Control Area. 1.3.22 OPERATING DAY. "Operating Day" shall mean the daily 24 hour period beginning at midnight for which transactions on the PJM Interchange Energy Market are scheduled. 1.3.23 OPERATING MARGIN. "Operating Margin" shall mean the incremental adjustments, measured in megawatts, required in PJM Control Area operations in order to accommodate, on a first contingency basis, an operating contingency in the PJM Control Area resulting from operations in an interconnected Control Area. Such adjustments may result in constraints causing Transmission Congestion Charges, or may result in Ancillary Services charges pursuant to the PJM Tariff. 1.3.24 OPERATING MARGIN CUSTOMER. "Operating Margin Customer" shall mean a Control Area purchasing Operating Margin pursuant to an agreement between such other Control Area and the LLC. 1.3.25 PJM INTERCHANGE. "PJM Interchange" shall mean the following, as determined in accordance with the Schedules to this Agreement: (a) for a Market Participant that is a Network Service User, the amount by which its hourly Equivalent Load exceeds, or is exceeded by, the sum of the hourly outputs of its operating generating resources; or (b) for a Market Participant that is not a Network Service User, the amount of its Spot Market Backup; or (c) the hourly scheduled deliveries of Spot Market Energy by a Market Seller from an External Resource; or (d) the hourly net metered output of any other Market Seller; or (e) the hourly scheduled deliveries of Spot Market Energy to an External Market Buyer; or (f) the hourly scheduled deliveries to an Internal Market Buyer that is not a Network Service User. 1.3.26 PJM INTERCHANGE EXPORT. "PJM Interchange Export" shall mean the following, as determined in accordance with the Schedules to this Agreement: (a) for a Market Participant that is a Network Service User, the amount by which its hourly Equivalent Load is exceeded by the sum of the hourly outputs of its operating generating resources; or (b) for a Market Participant that is not a Network Service User, the amount of its Spot Market Backup sales; or (c) the hourly scheduled deliveries of Spot Market Energy by a Market Seller from an External Resource; or (d) the hourly net metered output of any other Market Seller. 4 1.3.27 PJM INTERCHANGE IMPORT. "PJM Interchange Import" shall mean the following, as determined in accordance with the Schedules to this Agreement: (a) for a Market Participant that is a Network Service User, the amount by which its hourly Equivalent Load exceeds the sum of the hourly outputs of its operating generating resources; or (b) for a Market Participant that is not a Network Service User, the amount of its Spot Market Backup purchases; or (c) the hourly scheduled deliveries of Spot Market Energy to an External Market Buyer; or (d) the hourly scheduled deliveries to an Internal Market Buyer that is not a Network Service User. 1.3.28 PJM OPEN ACCESS SAME-TIME INFORMATION SYSTEM. "PJM Open Access Same-time Information System" shall mean the electronic communication system for the collection and dissemination of information about transmission services in the PJM Control Area, established and operated by the Office of the Interconnection in accordance with FERC standards and requirements. 1.3.29 POINT-TO-POINT TRANSMISSION SERVICE. "Point-to-Point Transmission Service" shall mean transmission service provided pursuant to the rates, terms and conditions set forth in Part II of the PJM Tariff. 1.3.30 RAMPING CAPABILITY. "Ramping Capability" shall mean the sustained rate of change of generator output, in megawatts per minute. 1.3.31 REGULATION. "Regulation" shall mean the capability of a specific generating unit with appropriate telecommunications, control and response capability to increase or decrease its output in response to a regulating control signal, in accordance with the specifications in the PJM Manuals. 1.3.32 REGULATION CLASS. "Regulation Class" shall mean a subset of the generation units capable of providing Regulation to the PJM Control Area determined by a range of costs for providing Regulation as specified by the Office of the Interconnection using procedures specified in the PJM Manuals. 1.3.32A SPOT MARKET BACKUP. "Spot Market Backup" shall mean the purchase of energy from, or the delivery of energy to, the PJM Interchange Energy Market in quantities sufficient to complete the delivery or receipt obligations of a bilateral contract that has been curtailed or interrupted for any reason. 5 1.3.33 SPOT MARKET ENERGY. "Spot Market Energy" shall mean energy bought or sold by Market Participants through the PJM Interchange Energy Market at Locational Marginal Prices determined as specified in Section 2 of this Schedule. 1.3.34 TRANSMISSION CONGESTION CHARGE. "Transmission Congestion Charge" shall mean a charge attributable to the increased cost of energy delivered at a given load bus when the transmission system serving that load bus is operating under constrained conditions, which shall be calculated and allocated as specified in Section 5.1 of this Schedule. 5a 1.3.35 TRANSMISSION CONGESTION CREDIT. "Transmission Congestion Credit" shall mean the allocated share of total Transmission Congestion Charges credited to each holder of Fixed Transmission Rights, calculated and allocated as specified in Section 5.2 of this Schedule. 1.3.36 TRANSMISSION CUSTOMER. "Transmission Customer" shall mean an entity using Point-to-Point Transmission Service. 1.3.37 TRANSMISSION FORCED OUTAGE. "Transmission Forced Outage" shall mean an immediate removal from service of a transmission facility by reason of an Emergency or threatened Emergency, unanticipated failure, or other cause beyond the control of the owner or operator of the transmission facility, as specified in the relevant portions of the PJM Manuals. A removal from service of a transmission facility at the request of the Office of the Interconnection to improve transmission capability shall not constitute a Forced Transmission Outage. 1.3.37A TRANSMISSION LOADING RELIEF. "Transmission Loading Relief" shall mean NERC's procedures for preventing operating security limit violations, as implemented by PJM as the security coordinator responsible for maintaining transmission security for the PJM Control Area. 1.3.37B TRANSMISSION LOADING RELIEF CUSTOMER. "Transmission Loading Relief Customer" shall mean a Member that, in accordance with Section 1.10.6A, has elected to pay Transmission Congestion Charges during Transmission Loading Relief in order to continue energy schedules over contract paths outside the PJM Control Area that are increasing the cost of energy in the PJM Control Area. [SUBJECT TO COMPLIANCE FILING TO 86 FERC (S) 61,015.] 1.3.38 TRANSMISSION PLANNED OUTAGE. "Transmission Planned Outage" shall mean any transmission outage scheduled in advance for a pre-determined duration and which meets the notification requirements for such outages specified in the PJM Manuals. 1.4 MARKET BUYERS. 1.4.1 QUALIFICATION. (a) To become a Market Buyer, an entity shall submit an application to the Office of the Interconnection, in such form as shall be established by the Office of the Interconnection. (b) An applicant that is a Load Serving Entity or that will purchase on behalf of or for ultimate delivery to a Load Serving Entity shall establish to the satisfaction of the Office of the Interconnection that the end-users that will be served through energy and related services purchased in the PJM Interchange Energy Market, are located electrically within the PJM Control Area, or will be brought within the PJM Control Area prior to any purchases from the PJM Interchange Energy Market. Such applicant shall further demonstrate that: i) The Load Serving Entity for the end users is obligated to meet the requirements of the Reliability Assurance Agreement; and ii) The Load Serving Entity for the end users has arrangements in place for Network Transmission Service or Point-To-Point Transmission Service for all PJM Interchange Energy Market purchases. (c) An applicant that is not a Load Serving Entity or purchasing on behalf of or for ultimate delivery to a Load Serving Entity shall demonstrate that: i) The applicant has obtained or will obtain Network Transmission Service or Point-to-Point Transmission Service for all PJM Interchange Energy Market purchases; and ii) The applicant's PJM Interchange Energy Market purchases will ultimately be delivered to a load in another Control Area that is recognized by NERC and that complies with NERC's standards for operating and planning reliable bulk electric systems. (d) All applicants shall demonstrate that: i) The applicant is capable of complying with all applicable metering, data storage and transmission, and other reliability, operation, planning and accounting standards and requirements for the operation of the PJM Control Area and the PJM Interchange Energy Market; ii) The applicant meets the creditworthiness standards established by the Office of the Interconnection, or has provided a letter of credit or other form of security acceptable to the Office of the Interconnection; and iii) The applicant has paid all applicable fees and reimbursed the Office of the Interconnection for all unusual or extraordinary costs of processing and evaluating its application to become a Market Buyer, and has agreed in its application to subject any disputes arising from its application to the PJM Dispute Resolution Procedures. (e) The applicant shall become a Market Buyer upon a final favorable determination on its application by the Office of the Interconnection as specified below, and execution by the applicant of counterparts of this Agreement. 1.4.2 SUBMISSION OF INFORMATION. The applicant shall furnish all information reasonably requested by the Office of the Interconnection in order to determine the applicant's qualification to be a Market Buyer. The Office of the Interconnection may waive the submission of information relating to any of the foregoing criteria, to the extent the information in the Office of the Interconnection's possession is sufficient to evaluate the application against such criteria. 1.4.3 FEES AND COSTS. The Office of the Interconnection shall require all applicants to become a Market Buyer to pay a uniform application fee, initially in the amount of $1,500, to defray the ordinary costs of processing such applications. The application fee shall be revised from time to time as the Office of the Interconnection shall determine to be necessary to recover its ordinary costs of processing applications. Any unusual or extraordinary costs incurred by the Office of the Interconnection in processing an application shall be reimbursed by the applicant. 1.4.4 OFFICE OF THE INTERCONNECTION DETERMINATION. Upon submission of the information specified above, and such other information as shall reasonably be requested by the Office of the Interconnection, the Office of the Interconnection shall undertake an evaluation and investigation to determine whether the applicant meets the criteria specified above. As soon as practicable, but in any event not later than 60 days after submission of the foregoing information, or such later date as may be necessary to satisfy the requirements of the Reliability Assurance Agreement, the Office of the Interconnection shall notify the applicant and the members of the Members Committee of its determination, along with a written summary of the basis for the determination. The Office of the Interconnection shall respond promptly to any reasonable and timely request by a Member for additional information regarding the basis for the Office of the Interconnection's determination, and shall take such action as it shall deem appropriate in response to any request for reconsideration or other action submitted to the Office of the Interconnection not later than 30 days from the initial notification to the Members Committee. 1.4.5 EXISTING PARTICIPANTS. Any entity that was qualified to participate as a Market Buyer in the PJM Interchange Energy Market under the Operating Agreement of PJM Interconnection L.L.C. in effect immediately prior to the Effective Date shall continue to be qualified to participate as a Market Buyer in the PJM Interchange Energy Market under this Agreement. 1.4.6 WITHDRAWAL. (a) An Internal Market Buyer that is a Load Serving Entity may withdraw from this Agreement by giving written notice to the Office of the Interconnection specifying an effective date of withdrawal not earlier than the effective date of (i) its withdrawal from the Reliability Assurance Agreement, or (ii) the assumption of its obligations under the Reliability Assurance Agreement by an agent that is a Market Buyer. (b) An External Market Buyer or an Internal Market Buyer that is not a Load Serving Entity may withdraw from this Agreement by giving written notice to the Office of the Interconnection specifying an effective date of withdrawal at least one day after the date of the notice . (c) Withdrawal from this Agreement shall not relieve a Market Buyer of any obligation to pay for electric energy or related services purchased from the PJM Interchange Energy Market prior to such withdrawal, to pay its share of any fees and charges incurred or assessed by the Office of the Interconnection prior to the date of such withdrawal, or to fulfill any obligation to provide indemnification for the consequences of acts, omissions or events occurring prior to such withdrawal; and provided, further, that withdrawal from this Agreement shall not relieve any Market Buyer of any obligations it may have under, or constitute withdrawal from, any other Related PJM Agreement. (d) A Market Buyer that has withdrawn from this Agreement may reapply to become a Market Buyer in accordance with the provisions of this Section 1.4, provided it is not in default of any obligation incurred under this Agreement. 8 1.5 MARKET SELLERS. 1.5.1 QUALIFICATION. A Member that demonstrates to the Office of the Interconnection that the Member meets the standards for the issuance of an order mandating the provision of transmission service under section 211 of the Federal Power Act, as amended by the Energy Policy Act of 1992, may become a Market Seller upon execution of this Agreement and submission to the Office of the Interconnection of the applicable Offer Data in accordance with the provisions of this Schedule. All Members that are Market Buyers shall become Market Sellers upon submission to the Office of the Interconnection of the applicable Offer Data in accordance with the provisions of this Schedule. 1.5.2 WITHDRAWAL. (a) A Market Seller may withdraw from this Agreement by giving written notice to the Office of the Interconnection specifying an effective date of withdrawal at least one day after the date of the notice; provided, however, that withdrawal shall not relieve a Market Seller of any obligation to deliver electric energy or related services to the PJM Interchange Energy Market pursuant to an offer made prior to such withdrawal, to pay its share of any fees and charges incurred or assessed by the Office of the Interconnection prior to the date of such withdrawal, or to fulfill any obligation to provide indemnification for the consequences of acts, omissions, or events occurring prior to such withdrawal; and provided, further, that withdrawal shall not relieve any entity that is a Market Seller and is also a Market Buyer of any obligations it may have as a Market Buyer under, or constitute withdrawal as a Market Buyer from, this Agreement or any other Related PJM Agreement. (b) A Market Seller that has withdrawn from this Agreement may reapply to become a Market Seller at any time, provided it is not in default with respect to any obligation incurred under this Agreement. 1.6 OFFICE OF THE INTERCONNECTION. 1.6.1 OPERATION OF THE PJM INTERCHANGE ENERGY MARKET The Office of the Interconnection shall operate the PJM Interchange Energy Market in accordance with this Agreement. 1.6.2 SCOPE OF SERVICES. The Office of the Interconnection shall, on behalf of the Market Participants, perform the services pertaining to the PJM Interchange Energy Market specified in this Agreement, including but not limited to the following: i) Administer the PJM Interchange Energy Market as part of the PJM Control Area, including scheduling and dispatching of generation resources, accounting for transactions, rendering bills to the Market Participants, receiving payments from and disbursing payments to the Market Participants, maintaining appropriate records, and monitoring the compliance of Market Participants with the provisions of this Agreement, all in accordance with applicable provisions of the Office of the Interconnection Agreement, and the Schedules to this Agreement; 9 ii) Review and evaluate the qualification of entities to be Market Buyers or Market Sellers under applicable provisions of this Agreement; iii) Coordinate, in accordance with applicable provisions of this Agreement, the Reliability Assurance Agreement, and the Transmission Owners Agreement, maintenance schedules for generation and transmission resources operated as part of the PJM Control Area; iv) Provide or coordinate the provision of ancillary services necessary for the operation of PJM Control Area or the PJM Interchange Energy Market; v) Determine and declare that an Emergency is expected to exist, exists, or has ceased to exist, in all or any part of the PJM Control Area, or in another Control Area interconnected directly or indirectly with the PJM Control Area, and serve as a primary point of contact for interested state or federal agencies; vi) Enter into (a) agreements for the transfer of energy in conditions constituting an Emergency in the PJM Control Area or in a Control Area interconnected with it, and the mutual provision of other support in such Emergency conditions with other Control Areas interconnected with the PJM Control Area, and (b) purchases of Emergency energy offered by Members from resources that are not Capacity Resources in conditions constituting an Emergency in the PJM Control Area; vii) Coordinate the curtailment or shedding of load, or other measures appropriate to alleviate an Emergency, in order to preserve reliability in accordance with NERC and MAAC principles, guidelines and standards, and to ensure the operation of the PJM Control Area in accordance with Good Utility Practice and the this Agreement; viii) Protect confidential information as specified in this Agreement; and ix) Send a representative to meetings of the Members Committee or other Committees, subcommittees, or working groups specified in this Agreement or formed by the Members Committee when requested to do so by the chair or other head of such committee or other group. 1.6.3 RECORDS AND REPORTS. The Office of the Interconnection shall prepare and maintain such records and prepare such reports, including, but not limited to quarterly budget reports, as are required to document the performance of its obligations to the Market Participants hereunder in a form adopted by the Office of the Interconnection upon consideration of the advice and recommendations of the Members Committee. The Office of the Interconnection shall also produce special reports reasonably requested by the Members Committee and consistent with FERC's standards of conduct; provided, however, the Market Participants shall reimburse the Office of the Interconnection for the costs of producing any such report. Notwithstanding the foregoing, the Office of the Interconnection shall not be required to disclose confidential or commercially sensitive information in any such report. 10 1.6.4 PJM MANUALS. The Office of the Interconnection shall prepare, maintain and update the PJM Manuals consistent with this Agreement. The PJM Manuals shall be available for inspection by the Market Participants, regulatory authorities with jurisdiction over the LLC or any Member, and the public. 1.7 GENERAL. 1.7.1 MARKET SELLERS. Only Market Sellers shall be eligible to submit offers to the Office of the Interconnection for the sale of electric energy or related services in the PJM Interchange Energy Market. Market Sellers shall comply with the prices, terms, and operating characteristics of all Offer Data submitted to and accepted by the PJM Interchange Energy Market. 1.7.2 MARKET BUYERS. Only Market Buyers shall be eligible to purchase energy or related services in the PJM Interchange Energy Market. Market Buyers shall comply with all requirements for making purchases from the PJM Interchange Energy Market. 1.7.3 AGENTS. A Market Participant may participate in the PJM Interchange Energy Market through an agent, provided that the Market Participant informs the Office of the Interconnection in advance in writing of the appointment of such agent. A Market Participant participating in the PJM Interchange Energy Market through an agent shall be bound by all of the acts or representations of such agent with respect to transactions in the PJM Interchange Energy Market, and shall ensure that any such agent complies with the requirements of this Agreement. 1.7.4 GENERAL OBLIGATIONS OF THE MARKET PARTICIPANTS. (a) In performing its obligations to the Office of the Interconnection hereunder, each Market Participant shall at all times (i) follow Good Utility Practice, (ii) comply with all applicable laws and regulations, (iii) comply with the applicable principles, guidelines, standards and requirements of FERC, NERC and MAAC, (iv) comply with the procedures established for operation of the PJM Interchange Energy Market and PJM Control Area and (v) cooperate with the Office of the Interconnection as necessary for the operation of the PJM Control Area in a safe, reliable manner consistent with Good Utility Practice. (b) Market Participants shall undertake all operations in or affecting the PJM Interchange Energy Market and the PJM Control Area, including but not limited to compliance with all Emergency procedures, in accordance with the power and authority of the Office of the Interconnection with respect to the operation of the PJM Interchange Energy Market and the PJM Control Area as established in this Agreement, and as specified in the Schedules to this Agreement and the PJM Manuals. Failure to comply with the foregoing operational requirements shall subject a Market Participant to such reasonable charges or other remedies or sanctions for non-compliance as may be established by the PJM Board, including legal or regulatory proceedings as authorized by the PJM Board to enforce the obligations of this Agreement. (c) The Office of the Interconnection may establish such committees with a 11 representative of each Market Participant, and the Market Participants agree to provide appropriately qualified personnel for such committees, as may be necessary for the Office of the Interconnection to perform its obligations hereunder. (d) All Market Participants shall provide to the Office of the Interconnection the scheduling and other information specified in the Schedules to this Agreement, and such other information as the Office of the Interconnection may reasonably require for the reliable and efficient operation of the PJM Control Area and the PJM Interchange Energy Market, and for compliance with applicable regulatory requirements for posting market and related information. Such information shall be provided as much in advance as possible, but in no event later than the deadlines established by the Schedules to this Agreement, or by the Office of the Interconnection in conformance with such Schedules. Such information shall include, but not be limited to, maintenance and other anticipated outages of generation or transmission facilities, scheduling and related information on bilateral transactions and self-scheduled resources, and implementation of active load management, interruption of load, and other load reduction measures. The Office of the Interconnection shall abide by appropriate requirements for the non-disclosure and protection of any confidential or proprietary information given to the Office of the Interconnection by a Market Participant. Each Market Participant shall maintain or cause to be maintained compatible information and communications systems, as specified by the Office of the Interconnection, required to transmit scheduling, dispatch, or other time-sensitive information to the Office of the Interconnection in a timely manner. (e) Each Market Participant shall install and operate, or shall otherwise arrange for, metering and related equipment capable of recording and transmitting all voice and data communications reasonably necessary for the Office of the Interconnection to perform the services specified in this Agreement. A Market Participant that elects to be separately billed for its PJM Interchange shall, to the extent necessary, be individually metered in accordance with Section 14 of this Agreement, or shall agree upon an allocation of PJM Interchange between it and the Market Participant through whose meters the unmetered Market Participant's PJM Interchange is delivered. The Office of the Interconnection shall be notified of the allocation by the foregoing Market Participants. (f) Each Market Participant shall operate, or shall cause to be operated, any generating resources owned or controlled by such Market Participant that are within the PJM Control Area or otherwise supplying energy to or through the PJM Control Area in a manner that is consistent with the standards, requirements or directions of the Office of the Interconnection and that will permit the Office of the Interconnection to perform its obligations under this Agreement; provided, however, no Market Participant shall be required to take any action that is inconsistent with Good Utility Practice or applicable law. (g) Each Market Participant shall follow the directions of the Office of the Interconnection to take actions to prevent, manage, alleviate or end an Emergency in a manner consistent with this Agreement and the procedures of the PJM Control Area as specified in the PJM Manuals. (h) Each Market Participant shall obtain and maintain all permits, licenses or approvals required for the Market Participant to participate in the PJM Interchange Energy Market in the manner contemplated by this Agreement. 12 1.7.5 MARKET OPERATIONS CENTER. Each Market Participant shall maintain a Market Operations Center, or shall make appropriate arrangements for the performance of such services on its behalf. A Market Operations Center shall meet the performance, equipment, communications, staffing and training standards and requirements specified in this Agreement for the scheduling and completion of transactions in the PJM Interchange Energy Market and the maintenance of the reliable operation of the PJM Control Area, and shall be sufficient to enable (i) a Market Seller to perform all terms and conditions of its offers to the PJM Interchange Energy Market, and (ii) a Market Buyer to conform to the requirements for purchasing from the PJM Interchange Energy Market. 1.7.6 SCHEDULING AND DISPATCHING. (a) The Office of the Interconnection shall schedule and dispatch generation economically on the basis of least-cost, security-constrained dispatch and the prices and operating characteristics offered by Market Sellers, continuing until sufficient generation is dispatched to serve the PJM Interchange Energy Market energy purchase requirements under normal system conditions of the Market Buyers, as well as the requirements of the PJM Control Area for ancillary services provided by such generation, in accordance with this Agreement. Scheduling and dispatch shall be conducted in accordance with this Agreement. (b) The Office of the Interconnection shall undertake to identify any conflict or incompatibility between the scheduling or other deadlines or specifications applicable to the PJM Interchange Energy Market, and any relevant procedures of another Control Area, or any tariff (including the PJM Tariff). Upon determining that any such conflict or incompatibility exists, the Office of the Interconnection shall propose tariff or procedural changes, and undertake such other efforts as may be appropriate, to resolve any such conflict or incompatibility. 1.7.7 PRICING. The price paid for energy bought and sold in the PJM Interchange Energy Market will reflect the hourly Locational Marginal Price at each load and generation bus, determined by the Office of the Interconnection in accordance with this Agreement. Transmission Congestion Charges, which shall be determined by differences in Locational Marginal Prices in an hour caused by transmission constraints, shall be calculated and collected, and the revenues therefrom shall be disbursed, by the Office of the Interconnection in accordance with this Schedule. 1.7.8 GENERATING MARKET BUYER RESOURCES. A Generating Market Buyer may elect to self-schedule its generation resources up to that Generating Market Buyer's Equivalent Load, in accordance with and subject to the procedures specified in this Schedule, and the accounting and billing requirements specified in Section 3 to this Schedule. 1.7.9 DELIVERY TO AN EXTERNAL MARKET BUYER. A purchase of Spot Market Energy by an External Market Buyer shall be delivered to a bus or busses at the border of the PJM Control Area specified by the Office of the Interconnection, or to load in the Control Area that is not served by Network Transmission Service, using Point-to-Point Transmission Service paid for by the External Market Buyer. Further delivery of such energy shall be the responsibility of the External Market Buyer. 13 1.7.10 OTHER TRANSACTIONS. (a) Market Participants may enter into bilateral contracts for the purchase or sale of electric energy to or from each other or any other entity, subject to the obligations of Market Participants to make Capacity Resources available for dispatch by the Office of the Interconnection. Bilateral arrangements that contemplate the physical transfer of energy to or from a Market Participant shall be reported to and coordinated with the Office of the Interconnection in accordance with this Schedule. (b) Market Participants shall have Spot Market Backup with respect to all bilateral transactions curtailed or interrupted for any reason (except for curtailments or interruptions through active load management for load located within the PJM Control Area); provided, however, that a Market Participant may elect in the day-ahead scheduling process not to have Spot Market Backup as specified in Section 1.10.1(d)(iv). (c) To the extent the Office of the Interconnection dispatches a Generating Market Buyer's generation resources, such Generating Market Buyer may elect to net the output of such resources against its hourly Equivalent Load. Such a Generating Market Buyer shall be deemed a buyer from the PJM Interchange Energy Market to the extent of its PJM Interchange Imports, and shall be deemed a seller to the PJM Interchange Energy Market to the extent of its PJM Interchange Exports. 1.7.11 EMERGENCIES. The Office of the Interconnection, with the assistance of the Members' dispatchers as it may request, shall be responsible for monitoring the operation of the PJM Control Area, for declaring the existence of an Emergency, and for directing the operations of Market Participants as necessary to manage, alleviate or end an Emergency. The standards, policies and procedures of the Office of the Interconnection for declaring the existence of an Emergency, including but not limited to a Minimum Generation Emergency, and for managing, alleviating or ending an Emergency, shall apply to all Members on a non- discriminatory basis. Actions by the Office of the Interconnection and the Market Participants shall be carried out in accordance with this Agreement, the NERC Operating Policies, MAAC reliability principles and standards, Good Utility Practice, and the PJM Manuals. A declaration that an Emergency exists or is likely to exist by the Office of the Interconnection shall be binding on all Market Participants until the Office of the Interconnection announces that the actual or threatened Emergency no longer exists. Consistent with existing contracts, all Market Participants shall comply with all directions from the Office of the Interconnection for the purpose of managing, alleviating or ending an Emergency. The Market Participants shall authorize the Office of the Interconnection to purchase or sell energy on their behalf to meet an Emergency, and otherwise to implement agreements with other Control Areas interconnected with the PJM Control Area for the mutual provision of service to meet an Emergency, in accordance with this Agreement. 1.7.12 FEES AND CHARGES. Each Market Participant shall pay all fees and charges of the Office of the Interconnection for operation of the PJM Interchange Energy Market as determined by and allocated to the Market Participant by the Office of the Interconnection in accordance with Schedule 3. 14 1.7.13 RELATIONSHIP TO PJM CONTROL AREA. The PJM Interchange Energy Market operates within and subject to the requirements for the operations of the PJM Control Area. 14a 1.7.14 PJM MANUALS. The Office of the Interconnection shall be responsible for maintaining, updating, and promulgating the PJM Manuals as they relate to the operation of the PJM Interchange Energy Market. The PJM Manuals, as they relate to the operation of the PJM Interchange Energy Market, shall conform and comply with this Agreement, NERC operating policies, and MAAC reliability principles, guidelines and standards, and shall be designed to facilitate administration of an efficient energy market within industry reliability standards and the physical capabilities of the PJM Control Area. 1.7.15 CORRECTIVE ACTION. Consistent with Good Utility Practice, the Office of the Interconnection shall be authorized to direct or coordinate corrective action, whether or not specified in the PJM Manuals, as necessary to alleviate unusual conditions that threaten the integrity or reliability of the PJM Control Area or the regional power system. 1.7.16 RECORDING. Subject to the requirements of applicable State or federal law, all voice communications with the Office of the Interconnection Control Center may be recorded by the Office of the Interconnection and any Market Participant communicating with the Office of the Interconnection Control Center, and each Market Participant hereby consents to such recording. 1.7.17 OPERATING RESERVES. The Office of the Interconnection shall schedule to the Operating Reserve and load-following objectives of the PJM Control Area and the PJM Interchange Energy Market in scheduling resources pursuant to this Schedule. A table of Operating Reserve objectives is calculated seasonally for various peak load levels and eight weekly periods and is published in the PJM Manuals. Reserve levels are probabilistically determined based on the season's historical load forecasting error and expected generation mix (including typical Planned and Forced/Unplanned Outages). 1.7.18 REGULATION. (a) Regulation shall be supplied from generators located within the metered electrical boundaries of the PJM Control Area. Generating Market Buyers, and Market Sellers offering Regulation, shall comply with applicable standards and requirements for Regulation capability and dispatch specified in the PJM Manuals. (b) The Office of the Interconnection shall obtain and maintain an amount of Regulation equal to the PJM Control Area Regulation objective as specified in the PJM Manuals. (c) The Regulation range of a unit shall be at least twice the amount of Regulation assigned. (d) A unit capable of automatic energy dispatch that is also providing Regulation shall have its energy dispatch range reduced by twice the amount of the Regulation provided. The amount of Regulation provided by a unit shall serve to redefine the Normal Minimum Generation and Normal Maximum Generation energy limits of that unit, in that the amount of Regulation shall be added to the unit's Normal Minimum Generation energy limit, and subtracted from its Normal Maximum Generation energy limit. 15 (e) Qualified Regulation must satisfy the verification tests described in the PJM Manuals. 1.7.19 RAMPING. A generator dispatched by the Office of the Interconnection pursuant to a control signal appropriate to increase or decrease the generator's megawatt output level shall be able to change output at the ramping rate specified in the Offer Data submitted to the Office of the Interconnection for that generator. 1.7.20 COMMUNICATION AND OPERATING REQUIREMENTS. (a) Market Participants. Each Market Participant shall have, or shall arrange to have, its transactions in the PJM Interchange Energy Market subject to control by a Market Operations Center, with staffing and communications systems capable of real-time communication with the Office of the Interconnection during normal and Emergency conditions and of control of the Market Participant's relevant load or facilities sufficient to meet the requirements of the Market Participant's transactions with the PJM Interchange Energy Market, including but not limited to the following requirements as applicable. (b) Market Sellers selling from resources within the PJM Control Area shall: report to the Office of the Interconnection sources of energy available for operation; supply to the Office of the Interconnection all applicable Offer Data; report to the Office of the Interconnection units that are self-scheduled; report to the Office of the Interconnection bilateral sales transactions to buyers not within the PJM Control Area; confirm to the Office of the Interconnection bilateral sales to Market Buyers within the PJM Control Area; respond to the Office of the Interconnection's directives to start, shutdown or change output levels of generation units, or change scheduled voltages or reactive output levels; continuously maintain all Offer Data concurrent with on- line operating information; and ensure that, where so equipped, generating equipment is operated with control equipment functioning as specified in the PJM Manuals. (c) Market Sellers selling from resources outside the PJM Control Area shall: provide to the Office of the Interconnection all applicable Offer Data, including offers specifying amounts of energy available, hours of availability and prices of energy and other services; respond to Office of the Interconnection directives to schedule delivery or change delivery schedules; and communicate delivery schedules to the Market Seller's Control Area. (d) Market Participants that are Load Serving Entities or purchasing on behalf of Load Serving Entities shall: provide to the Office of the Interconnection forecasts of load to be served as required by the Office of the Interconnection; respond to Office of the Interconnection directives for load management steps; report to the Office of the Interconnection Capacity Resources to satisfy capacity obligations that are available for pool operation; report to the Office of the Interconnection all bilateral purchase transactions; respond to other Office of the Interconnection directives such as those required during Emergency operation. (e) Market Participants that are not Load Serving Entities or purchasing on behalf of Load Serving Entities shall: provide to the Office of the Interconnection requests to purchase specified amounts of energy for each hour of the Operating Day during which it intends to purchase from the PJM Interchange Energy Market, along with Dispatch Rate levels above which it does not desire to purchase; respond to other Office of the Interconnection directives such as those required during Emergency operation. 16 1.7.21 MULTI-SETTLEMENT SYSTEM. The PJM Interchange Energy Market shall be enhanced by an amendment to this Schedule, to be filed with FERC not later than December 31, 1997, that will provide for the implementation of a multi-settlement system as soon thereafter as shall be determined by the Office of the Interconnection to be reasonably practical. Such a system will provide an opportunity for Market Participants to commit and obtain commitments to energy prices and transmission congestion charges at certain specified deadlines in advance of the Office of the Interconnection's real-time dispatch. The Members specified in Section 11.5(c) of the Agreement, working with the Office of the Interconnection, shall develop the details of the implementation of such a multi-settlement system. 1.8 SELECTION, SCHEDULING AND DISPATCH PROCEDURE ADJUSTMENT PROCESS. 1.8.1 PJM DISPUTE RESOLUTION AGREEMENT. Subject to the condition specified below, any Member adversely affected by a decision of the Office of the Interconnection with respect to the operation of the PJM Interchange Energy Market, including the qualification of an entity to participate in that market as a buyer or seller, make seek such relief as may be appropriate under the PJM Dispute Resolution Procedures on the grounds that such decision does not have an adequate basis in fact or does not conform to the requirements of this Agreement. 1.8.2 MARKET OR CONTROL AREA HOURLY OPERATIONAL DISPUTES. (a) Market Participants shall comply with all determinations of the Office of the Interconnection on the selection, scheduling or dispatch of resources in the PJM Interchange Energy Market, or to meet the operational requirements of the PJM Control Area. Complaints arising from or relating to such determinations shall be brought to the attention of the Office of the Interconnection not later than the end of the fifth business day after the end of the Operating Day to which the selection or scheduling relates, or in which the scheduling or dispatch took place, and shall include, if practicable, a proposed resolution of the complaint. Upon receiving notification of the dispute, the Office of the Interconnection and the Market Participant raising the dispute shall exert their best efforts to obtain and retain all data and other information relating to the matter in dispute, and to notify other Market Participants that are likely to be affected by the proposed resolution. Subject to confidentiality or other non-disclosure requirements, representatives of the Office of the Interconnection, the Market Participant raising the dispute, and other interested Market Participants, shall meet within three business days of the foregoing notification, or at such other or further times as the Office of the Interconnection and the Market Participants may agree, to review the relevant facts, and to seek agreement on a resolution of the dispute. (b) If the Office of the Interconnection determines that the matter in dispute discloses a defect in operating policies, practices or procedures subject to the discretion of the Office of the Interconnection, the Office of the Interconnection shall implement such changes as it deems appropriate and shall so notify the Members Committee. Alternatively, the Office of the Interconnection may notify the Members Committee of a proposed change and solicit the comments or other input of the Members. (c) If either the Office of the Interconnection, the Market Participant raising 17 the dispute, or another affected Market Participant believes that the matter in dispute has not been adequately resolved, or discloses a need for changes in standards or policies established in or pursuant to the Operating Agreement, any of the foregoing parties may make a written request for review of the matter by the Members Committee, and shall include with the request the forwarding party's recommendation and such data or information (subject to confidentiality or other non-disclosure requirements) as would enable the Members Committee to assess the matter and the recommendation. The Members Committee shall take such action on the recommendation as it shall deem appropriate. (d) Subject to the right of a Market Participant to obtain correction of accounting or billing errors, the LLC or a Market Participant shall not be entitled to actual, compensatory, consequential or punitive damages, opportunity costs, or other form of reimbursement from the LLC or any other Market Participant for any loss, liability or claim, including any claim for lost profits, incurred as a result of a mistake, error or other fault by the Office of the Interconnection in the selection, scheduling or dispatch of resources. 1.9 PRESCHEDULING. The following procedures and principles shall govern the prescheduling activities necessary to plan for the reliable operation of the PJM Control Area and for the efficient operation of the PJM Interchange Energy Market. 1.9.1 OUTAGE SCHEDULING. The Office of the Interconnection shall be responsible for coordinating and approving requests for outages of generation and transmission facilities as necessary for the reliable operation of the PJM Control Area, in accordance with the PJM Manuals. The Office of the Interconnection shall maintain records of outages and outage requests of these facilities. 1.9.2 PLANNED OUTAGES. (a) A Generator Planned Outage shall be included in Generator Planned Outage schedules established prior to the scheduled start date for the outage, in accordance with standards and procedures specified in the PJM Manuals. (b) The Office of the Interconnection shall conduct Generator Planned Outage scheduling for Capacity Resources in accordance with the Reliability Assurance Agreement and the PJM Manuals and in consultation with the Members owning or controlling the output of Capacity Resources. A Market Participant shall not be expected to submit offers for the sale of energy or other services, or to satisfy delivery obligations, from all or part of a generation resource undergoing an approved Generator Planned Outage. If the Office of the Interconnection determines that approval of a Generator Planned Outage would significantly affect the reliable operation of the PJM Control Area, the Office of the Interconnection may withhold approval or withdraw a prior approval. Approval for a Generator Planned Outage of a Capacity Resource shall be withheld or withdrawn only as necessary to ensure the adequacy of reserves or the reliability of the PJM Control Area in connection with anticipated implementation or avoidance of Emergency procedures. If the Office of the Interconnection withholds or withdraws approval, it shall coordinate with the Market Participant owning or controlling the resource to reschedule the Generator Planned Outage of the Capacity Resource at the earliest practical time. The Office of the Interconnection shall if possible propose alternative schedules with the intent of minimizing 18 the economic impact on the Market Participant of a Generator Planned Outage. (c) The Office of the Interconnection shall conduct Planned Transmission Outage scheduling in accordance with procedures specified in the Transmission Owners Agreement and the PJM Manuals. If the Office of the Interconnection determines that transmission maintenance schedules proposed by one or more Members would significantly affect the efficient and reliable operation of the PJM Control Area, the Office of the Interconnection may propose alternative schedules, but such alternative shall minimize the economic impact on the Member or Members whose maintenance schedules the Office of the Interconnection proposes to modify. The Office of the Interconnection shall coordinate resolution of outage or other planning conflicts that may give rise to unreliable system conditions. The Members shall comply with all maintenance schedules established by the Office of the Interconnection. 1.9.3 GENERATOR MAINTENANCE OUTAGES A Market Participant may request approval for a Generator Maintenance Outage of any Capacity Resource from the Office of the Interconnection in accordance with the timetable and other procedures specified in the PJM Manuals. The Office of the Interconnection shall approve requests for Generator Maintenance Outages for a Capacity Resource unless the outage would threaten the adequacy of reserves in, or the reliability of, the PJM Control Area. A Market Participant shall not be expected to submit offers for the sale of energy or other services, or to satisfy delivery obligations, from a generation resource undergoing an approved full or partial Generator Maintenance Outage. 1.9.4 FORCED OUTAGES (a) Each Market Seller that owns or controls a pool-scheduled resource, or Capacity Resource whether or not pool-scheduled, shall: (i) advise the Office of the Interconnection of a Generator Forced Outage suffered or anticipated to be suffered by any such resource as promptly as possible; (ii) provide the Office of the Interconnection with the expected date and time that the resource will be made available; and (iii) make a record of the events and circumstances giving rise to the Generator Forced Outage. A Market Seller shall not be expected to submit offers for the sale of energy or other services, or satisfy delivery obligations, from a generation resource undergoing a Generator Forced Outage. A Capacity Resource that does not deliver all or part of its scheduled energy shall be deemed to have experienced a Generator Forced Outage with respect to such undelivered energy, in accordance with standards and procedures for full and partial Generator Forced Outages specified in the Reliability Assurance Agreement and the PJM Manuals. (b) The Office of the Interconnection shall receive notification of Forced Transmission Outages, and information on the return to service, of Transmission Facilities in the PJM Control Area in accordance with standards and procedures specified in the Transmission Owners Agreement and the PJM Manuals. 19 1.9.5 MARKET PARTICIPANT RESPONSIBILITIES. Each Market Participant making a bilateral sale covering a period greater than the following Operating Day from a generating resource located within the PJM Control Area for delivery outside the PJM Control Area shall furnish to the Office of the Interconnection, in the form and manner specified in the PJM Manuals, information regarding the source of the energy, the load sink, the energy schedule, and the amount of energy being delivered. 1.9.6 INTERNAL MARKET BUYER RESPONSIBILITIES. Each Internal Market Buyer making a bilateral purchase covering a period greater than the following Operating Day shall furnish to the Office of the Interconnection, in the form an manner specified in the PJM Manuals, information regarding the source of the energy, the load sink, the energy schedule, and the amount of energy being delivered. Each Internal Market Buyer shall provide the Office of the Interconnection with details of any load management agreements with customers that allow the Office of the Interconnection to reduce load under specified circumstances. 1.9.7 MARKET SELLER RESPONSIBILITIES (a) Not less than 30 days before a Market Seller's initial offer to sell energy from a given generation resource on the PJM Interchange Energy Market, the Market Seller shall furnish to the Office of the Interconnection the information specified in the Offer Data for new generation resources. (b) Market Sellers authorized and intending to request market-based start-up and no-load fees in their Offer Data shall submit a specification of such fees to the Office of the Interconnection for each generating unit as to which the Market Seller intends to request such fees. Any such specification shall be submitted on or before March 31 for the period April 1 through September 30, and on or before September 30 for the period October 1 through March 31, and shall remain in effect without change throughout each such period for which a specification was submitted. The Office of the Interconnection shall reject any request for start-up and no-load fees in a Market Seller's Offer Data that does not conform to the Market Seller's specification on file with the Office of the Interconnection. 1.9.8 OFFICE OF THE INTERCONNECTION RESPONSIBILITIES (a) The Office of the Interconnection shall perform seasonal operating studies to assess the forecasted adequacy of generating reserves and of the transmission system, in accordance with the procedures specified in the PJM Manuals. (b) The Office of the Interconnection shall maintain and update tables setting forth Operating Reserve and other reserve objectives as specified in the PJM Manuals. (c) The Office of the Interconnection shall receive and process requests for firm and non-firm transmission service in accordance with procedures specified in the PJM Tariff. (d) The Office of the Interconnection shall maintain such data and information relating to generation and transmission facilities in the PJM Control Area as may be necessary or appropriate to conduct the scheduling and dispatch of the PJM Interchange Energy Market and PJM Control Area. 20 (e) The Office of the Interconnection shall coordinate with other interconnected Control Area as necessary to manage, alleviate or end an Emergency. 1.10 SCHEDULING. The following scheduling procedures and principles shall govern the commitment of resources to the PJM Interchange Energy Market over a period extending from one week to one day prior to the Operating Day that transactions are to take place. Scheduling encompasses the day-ahead and hourly scheduling process, through which the Office of the Interconnection determines, based on changing forecasts of conditions and actions by Market Participants and system constraints, a plan to serve the hourly energy and reserve requirements of the Internal Market Buyers and the purchase requests of the External Market Buyers in the least costly manner, subject to maintaining the reliability of the PJM Control Area. Scheduling shall be conducted as specified below, subject to the following condition. If the Office of the Interconnection's forecast for the next seven days projects a likelihood of Emergency conditions, the Office of the Interconnection may commit, for all or part of such seven day period, to the use of generation resources with notification or start-up times greater than one day as necessary in order to alleviate or mitigate such Emergency, in accordance with the Market Sellers' offers for such units for such periods and the specifications in the PJM Manuals. 1.10.1 DAY-AHEAD SCHEDULING. The following actions shall occur not later than 12:00 noon on the day before the Operating Day for which transactions are being scheduled. (a) Each Market Participant that is a Load Serving Entity or purchasing on behalf of a Load Serving Entity shall submit to the Office of the Interconnection forecasts of its customer loads for the next Operating Day as required by the PJM Manuals. If a Market Participant expects to curtail load at a specific Dispatch Rate, it should specify the Dispatch Rate and estimated load curtailment. (b) Each Market Participant that is not a Load Serving Entity or purchasing on behalf of a Load Serving Entity shall submit to the Office of the Interconnection requests to purchase specified amounts of energy for each hour of the Operating Day during which it intends to purchase from the PJM Interchange Energy Market, along with Dispatch Rate levels above which it does not desire to purchase, in accordance with the specifications set forth in the PJM Manuals. (c) Each Generating Market Buyer shall submit to the Office of the Interconnection: (i) hourly schedules for resource increments, including hydropower units, self-scheduled by the Market Buyer to meet its Equivalent Load; and (ii) the Dispatch Rate at which each such self-scheduled resource will disconnect or reduce output, or confirmation of the Market Buyer's intent not to reduce output. (d) All Market Participants shall submit to the Office of the Interconnection schedules for any bilateral transactions involving use of generation or Transmission Facilities as specified below, and shall inform the Office of the Interconnection if the parties to the transaction are not willing to incur Transmission Congestion Charges in order to complete any such scheduled bilateral transaction. Scheduling of bilateral transactions shall be conducted in accordance with the specifications in the PJM Manuals and the following requirements: 21 i) Internal Market Buyers shall submit schedules for all bilateral purchases for delivery within the PJM Control Area, whether from generation resources inside or outside the PJM Control Area; ii) Market Sellers shall submit schedules for bilateral sales to entities outside the PJM Control Area from generation within the PJM Control Area; and iii) In addition to the foregoing schedules for bilateral transactions, Market Participants shall submit confirmations of each scheduled bilateral transaction from each other party to the transaction in addition to the party submitting the schedule, or the adjacent Control Area. iv) Market Participants shall specify any bilateral transactions from sources inside the PJM Control Area for delivery to load outside the PJM Control Area that are not to have Spot Market Backup, provided that the sources for such transactions shall not be Capacity Resources and shall be subject to imbalance payments in accordance with an interconnection or other agreement with the LLC. (e) Market Sellers wishing to sell on the PJM Interchange Energy Market shall submit offers for the supply of energy (including energy from hydropower units), Regulation, Operating Reserves or other services for the following Operating Day. Offers shall be submitted to the Office of the Interconnection in the form specified by the Office of the Interconnection and shall contain the information specified in the Office of the Interconnection's Offer Data specification, as applicable. Market Sellers owning or controlling the output of a Capacity Resource that has not been rendered unavailable by a Generation Planned Outage, a Generator Maintenance Outage, or a Generation Forced Outage shall submit offers for the available capacity of such Capacity Resource, including any portion that is self-scheduled by the Generating Market Buyer claiming the resource as a Capacity Resource. The submission of offers for resource increments that are not Capacity Resources shall be optional, but any such offers must contain the information specified in the Office of the Interconnection's Offer Data specification, as applicable. Energy offered from generation resources that are not Capacity Resources shall not be supplied from resources that are included in or otherwise committed to supply the Operating Reserves of another Control Area. The foregoing offers: i) Shall specify the generation resource and energy for each hour in the offer period; ii) Shall specify the amounts and prices for the entire Operating Day for each resource component offered by the Market Seller to the Office of the Interconnection; iii) If based on energy from a specific generating unit, may specify start-up and no-load fees equal to the specification of such fees for such unit on file with the Office of the Interconnection; iv) Shall set forth any special conditions upon which the Market Seller proposes to supply a resource increment, including any curtailment rate specified in a bilateral contract for the output of the resource, or any cancellation fees; 22 v) May include a schedule of offers for prices and operating data contingent on acceptance by the deadline specified in this Schedule, with a second schedule applicable if accepted after the foregoing deadline; vi) Shall constitute an offer to submit the resource increment to the Office of the Interconnection for scheduling and dispatch in accordance with the terms of the offer, which offer shall remain open through the Operating Day for which the offer is submitted; 22a vii) Shall be final as to the price or prices at which the Market Seller proposes to supply energy or other services to the PJM Interchange Energy Market, such price or prices being guaranteed by the Market Seller for the period extending through the end of the following Operating Day; and viii) Shall not exceed an energy offer price of $1,000/megawatt-hour. (f) A Market Seller that wishes to sell Regulation service shall submit an offer for Regulation that shall specify the MW of Regulation being offered and the Regulation Class from which such Regulation is being offered. The range of costs defining Regulation Classes, and the average cost for each Regulation Class, shall be determined periodically by the Office of the Interconnection on the basis of prior energy bid prices and appropriate fuel indices, in accordance with procedures specified in the PJM Manuals. Qualified Regulation capability must satisfy the verification tests specified in the PJM Manuals. (g) Each Market Seller owning or controlling the output of a Capacity Resource shall submit a forecast of the availability of each such Capacity Resource for the next seven days. A Market Seller (i) may submit a non-binding forecast of the price at which it expects to offer a generation resource increment to the Office of the Interconnection over the next seven days, and (ii) shall submit a binding offer for energy, along with start-up and no-load fees, if any, for the next seven days or part thereof, for any generation resource with minimum notification or start-up requirement greater than 24 hours. (h) Each offer by a Market Seller of a Capacity Resource shall remain in effect for subsequent Operating Days until superseded or canceled. (i) The Office of the Interconnection shall post on the PJM Open Access Same-time Information System its estimate of the combined hourly load of the Market Buyers for the next four days, and peak load forecasts for an additional three days. 1.10.2 POOL-SCHEDULED RESOURCES. Pool-scheduled resources shall be governed by the following principles and procedures. (a) Pool-scheduled resources shall be selected by the Office of the Interconnection on the basis of the prices offered for energy and related services, start-up, no-load and cancellation fees, and the specified operating characteristics, offered by Market Sellers to the Office of the Interconnection by the 12:00 noon offer deadline. (b) A resource that is scheduled by a Market Participant to support a bilateral sale, or that is self-scheduled by a Generating Market Buyer, shall not be selected by the Office of the Interconnection as a pool-scheduled resource except in an Emergency. (c) Market Sellers offering energy from hydropower or other facilities with fuel or environmental limitations may submit data to the Office of the Interconnection that is sufficient to enable the Office of the Interconnection to determine the available operating hours of such facilities. (d) The Market Seller of a resource selected as a pool-scheduled resource shall receive payments or credits for energy or related services, or for start-up and no-load fees, from the Office of the Interconnection on behalf of the Market Buyers in accordance with Section 3 23 of this Schedule 1. Alternatively, the Market Seller shall receive, in lieu of start-up and no-load fees, its actual costs incurred, if any, up to a cap of the resource's start-up cost, if the Office of the Interconnection cancels its selection of the resource as a pool-scheduled resource and so notifies the Market Seller before the resource is synchronized. (e) Market Participants shall make available their pool-scheduled resources to the Office of the Interconnection for coordinated operation to supply the needs of the PJM Control Area for Operating Reserves. 1.10.3 SELF-SCHEDULED RESOURCES. Self-scheduled resources shall be governed by the following principles and procedures. (a) Each Generating Market Buyer shall use all reasonable efforts, consistent with Good Utility Practice, not to self-schedule resources in excess of its Equivalent Load. (b) The offered prices of resources that are self-scheduled, or otherwise not following the dispatch orders of the Office of the Interconnection, shall not be considered by the Office of the Interconnection in determining Locational Marginal Prices. (c) Market Participants shall make available their self-scheduled resources to the Office of the Interconnection for coordinated operation to supply the needs of the PJM Control Area for Operating Reserves. 1.10.4 CAPACITY RESOURCES. (a) A Capacity Resource selected as a pool-scheduled resource shall be made available for scheduling and dispatch at the direction of the Office of the Interconnection. A Capacity Resource that does not deliver energy as scheduled shall be deemed to have experienced a Generator Forced Outage to the extent of such energy not delivered. (b) Energy from a Capacity Resource that has not been selected as a pool-scheduled resource may be sold on a bilateral basis by the Market Seller, or may be self-scheduled. A Capacity Resource that has not been selected as a pool-scheduled resource and that has been sold on a bilateral basis must be made available upon request to the Office of the Interconnection for scheduling and dispatch if the Office of the Interconnection declares a Maximum Generation Emergency. Any such resource so scheduled and dispatched shall receive the applicable Locational Marginal Price for energy delivered. (c) A Capacity Resource that has been self-scheduled shall not receive payments or credits for start-up or no-load fees. 24 1.10.5 EXTERNAL RESOURCES. (a) External Resources may submit offers to the PJM Interchange Energy Market, in accordance with the day-ahead scheduling process specified above. An External Resource selected as a pool-scheduled resource shall be made available for scheduling and dispatch at the direction of the Office of the Interconnection, and except as specified below shall be compensated on the same basis as other pool-scheduled resources. External Resources that are not capable of dynamic dispatch shall, if selected by the Office of the Interconnection on the basis of the Market Seller's Offer Data, be block loaded on an hourly scheduled basis. Market Sellers shall offer External Resources to the PJM Interchange Energy Market on either a resource-specific or an aggregated resource basis. (b) Offers for External Resources from an aggregation of two or more generating units shall so indicate, and shall specify, in accordance with the Offer Data requirements specified by the Office of the Interconnection: (i) energy prices; (ii) hours of energy availability; (iii) a minimum dispatch level; (iv) a maximum dispatch level; and (v) unless such information has previously been made available to the Office of the Interconnection, sufficient information, as specified in the PJM Manuals, to enable the Office of the Interconnection to model the flow into the PJM Control Area of any energy from the External Resources scheduled in accordance with the Offer Data. If a Market Seller submits more than one offer on an aggregated resource basis, the withdrawal of any such offer shall be deemed a withdrawal of all higher priced offers for the same period. (c) Offers for External Resources on a resource-specific basis shall specify the resource being offered, along with the information specified in the Offer Data as applicable. A Market Seller offering an External Resource on a resource-specific basis that does not deliver energy as schedule by the Office of the Interconnection shall be assessed a non-delivery charge as specified below, unless the resource being offered has suffered a Generator Forced Outage. The burden shall be on the Market Seller to demonstrate to the reasonable satisfaction of the Office of the Interconnection that the resource being offered has experience a Generator Forced Outage. (d) Subject to the conditions specified in this paragraph, the non-delivery charge for External Resources that do not deliver energy as schedule shall be calculated hourly as follows: Pro-rated start-up plus hourly no-load fees specified in the Offer Data + [offered minimum dispatch level * (Locational Marginal Price - offered energy price) * 110%]. For purposes of the foregoing calculation: (i) the Locational Marginal Price shall be the Locational Marginal Price at the buses at which the energy from the External Resource should have been delivered to the PJM Control Area; (ii) if the Locational Marginal Price less the offered energy price is less than zero, this difference shall be set to zero; (iii) start-up and no-load fees shall be subject to the requirements of the Schedule; and (iv) the non-delivery charge shall not be assessed for energy the delivery of which is curtailed by a control area operator. Payments or credits for non-delivery charges shall be used by the Office of the Interconnection to reduce or offset PJM Control Area costs for Operating Reserves. 25 1.10.6 EXTERNAL MARKET BUYERS. (a) Deliveries to an External Market Buyer not subject to dynamic dispatch by the Office of the Interconnection shall be delivered on a block loaded basis to the load bus or busses at the border of the PJM Control Area, or in the PJM Control Area with respect to an External Market Buyer's load within the PJM Control Area not served by Network Service, at which the energy is delivered to or for the External Market Buyer. External Market Buyers shall be charged the Locational Marginal Price for energy at the foregoing load bus or busses. (b) An External Market Buyer's hourly schedules for energy purchased from the PJM Interchange Energy Market shall conform to the ramping and other applicable requirements of the interconnection agreement between the PJM Control Area and the Control Area to which, whether as an intermediate or final point of delivery, the purchased energy will initially be delivered. (c) The Office of the Interconnection shall curtail deliveries to an External Market Buyer if necessary to maintain appropriate reserve levels for the PJM Control Area as defined in the PJM Manuals, or to avoid shedding load in the PJM Control Area. (d) An external Market Buyer that does not take delivery of the amounts of energy specified in its request to purchase shall be assessed a non-delivery charge, or if using Point-to-Point service within the PJM Control Area shall pay for imbalance service as specified in the Tariff. The non-delivery charge shall be calculated as the summation of all applicable busses of the product of (i) the Locational Marginal Price at each load bus at which delivery was not taken, times (ii) the amount of energy not taken each hour at such bus. The non- delivery charge shall not apply to deliveries curtailed be a control area operator, or for periods when the Dispatch Rate exceeds the maximum value specified by the External Market Buyer in accordance with this Schedule. Payments or credits for non-delivery charges shall be used by the Office of the Interconnection to reduce or offset PJM Control Area costs for Operating Reserves. 1.10.6A TRANSMISSION LOADING RELIEF CUSTOMERS. (a) A Member that desires to elect to pay Transmission Congestion Charges in order to continue its energy schedules during an Operating Day over contract paths outside the PJM Control Area in the event that PJM initiates Transmission Loading Relief that otherwise would cause PJM to request security coordinators to curtail such Member's energy schedules shall: (i) enter its election on OASIS by 12:00 p.m. of the day before the Operating Day, in accordance with procedures established by PJM, which election shall be applicable for the entire Operating Day; and (ii) if PJM initiates Transmission Loading Relief, provide to PJM, at such time and in accordance with procedures established by PJM, the hourly integrated energy schedules that impacted the PJM Control Area (as indicated from the NERC Interchange Distribution Calculator) during the Transmission Loading Relief. (b) If a Member has made the election specified in Section (a), then PJM shall not request security coordinators to curtail such Member's energy transactions, except as may be necessary to respond to Emergencies. [SUBJECT TO COMPLIANCE FILING TO 86 FERC ' 61,015.] 1.10.7 BILATERAL TRANSACTIONS. Bilateral transactions as to which the parties have notified the Office of the Interconnection by 12:00 p.m. of the day before the Operating Day that they are not willing to incur Transmission Congestion Charges shall be curtailed by the Office of the Interconnection as necessary to reduce or alleviate transmission congestion. Bilateral transactions willing to incur congestion charges shall continue to be implemented during periods of congestion, except as may be necessary to respond to Emergencies. 26 1.10.8 OFFICE OF THE INTERCONNECTION RESPONSIBILITIES. (a) The Office of the Interconnection shall use its best efforts to determine the least-cost means of satisfying the projected hourly requirements for energy, Operating Reserves, and other ancillary services of the Market Buyers, including the reliability requirements of the PJM Control Area. In making this determination, the Office of the Interconnection shall take into account: (i) the Office of the Interconnection's forecasts of PJM Interchange Energy Market and PJM Control Area energy requirements, giving due consideration to the energy requirement forecasts and purchase requests submitted by Market Buyers; (ii) the offers submitted by Market Sellers; (iii) the availability of limited energy resources; (iv) the capacity, location, and other relevant characteristics of self-scheduled resources; (v) the objectives of the PJM Control Area for Operating Reserves, as specified in the PJM Manuals; (vi) the requirements of the PJM Control Area for Regulation and other ancillary services, as specified in the PJM Manuals; (vii) the benefits of avoiding or minimizing transmission constraint control operations, as specified in the PJM Manuals; and (viii) such other factors as the Office of the Interconnection reasonably concludes are relevant to the foregoing determination. The Office of the Interconnection shall develop a schedule of generation resources based on the foregoing determination. The Office of the Interconnection shall report the planned schedule for a hydropower resource to the operator of that resource as necessary for plant safety and security, and legal limitations on pond elevations. (b) Not later than 4:00 p.m. of the day before each Operating Day, or such earlier deadline as may be specified by the Office of the Interconnection in the PJM Manuals, the Office of the Interconnection shall: (i) post on the PJM Open Access Same-time Information System its forecast of the location and duration of any expected transmission congestion, and of the range of differences in Locational Marginal Prices between major subareas of the PJM Control Area expected to result from such transmission congestion; and (ii) inform each Market Seller whether its offer or offers have been accepted. (c) The Office of the Interconnection shall revise its schedule of generation resources to reflect updated projections of load, conditions affecting electric system operations in the PJM Control Area, the availability of and constraints on limited energy and other resources, transmission constraints, and other relevant factors. The Office of the Interconnection shall post on the PJM Open Access Same-time Information System at times specified in the PJM Manuals a revised forecast of the location and duration of any expected transmission congestion, and of the range of differences in Locational Marginal Prices between major subareas of the PJM Control Area expected to result from such transmission congestion. 1.10.9 HOURLY SCHEDULING (a) Following the initial posting of the Office of the Interconnection's transmission congestion forecast, and subject to the right of the Office of the Interconnection to schedule and dispatch pool-scheduled resources and to direct that schedules be changed in an Emergency, a Market Participant may adjust the schedule of a resource under its dispatch control on an hour-to-hour basis beginning at 10:00 p.m. of the day before each Operating Day, provided that the Office of the Interconnection is notified not later than 60 minutes prior to the hour in which the adjustment is to take effect, as follows: i) A Generating Market Buyer may self-schedule any of its resource 27 increments, including hydropower resources, not previously designated as self-scheduled and not selected as a pool-scheduled resource; ii) A Market Participant may request the scheduling of a non-firm bilateral transaction; or iii) A Market Participant may request the scheduling of deliveries or receipts of Spot Market Energy; or iv) A Generating Market Buyer may remove from service a resource increment, including a hydropower resource, that it had previously designated as self-scheduled, provided that the Office of the Interconnection shall have the option to schedule energy from any such resource increment that is a Capacity Resource at the price offered in the scheduling process, with no obligation to pay any start-up fee. (b) An External Market Buyer may refuse delivery of some or all of the energy it requested to purchase by notifying the Office of the Interconnection of the adjustment in deliveries not later than 60 minutes prior to the hour in which the adjustment is to take effect. 1.11 DISPATCH. The following procedures and principles shall govern the dispatch of the resources available to the Office of the Interconnection. 1.11.1 RESOURCE OUTPUT. The Office of the Interconnection shall have the authority to direct any Market Seller to adjust the output of any pool-scheduled resource increment within the operating characteristics specified in the Market Seller's offer. The Office of the Interconnection may cancel its selection of, or otherwise release, pool-scheduled resources, subject to an obligation to pay any applicable start- up, no-load or cancellation fees. The Office of the Interconnection shall adjust the output of pool-scheduled resource increments as necessary: (a) to maintain reliability, and subject to that constraint, to minimize the cost of supplying the energy, reserves, and other services required by the Market Buyers and the operation of the PJM Control Area; (b) to balance load and generation, maintain scheduled tie flows, and provide frequency support within the PJM Control Area; and (c) to minimize unscheduled interchange not frequency related between the PJM Control Area and other Control Areas. 1.11.2 OPERATING BASIS. In carrying out the foregoing objectives, the Office of the Interconnection shall conduct the operation of the PJM Control Area in accordance with the PJM Manuals, and shall: (i) utilize available generating reserves and obtain required replacements; and (ii) monitor the availability of adequate reserves. 28 1.11.3 POOL-DISPATCHED RESOURCES (a) The Office of the Interconnection shall implement the dispatch of energy from pool-scheduled resources with limited energy by direct request. In implementing mandatory or economic use of limited energy resources, the Office of the Interconnection shall use its best efforts to select the most economic hours of operation for limited energy resources, in order to make optimal use of such resources consistent with the dynamic load-following requirements of the PJM Control Area and the availability of other resources to the Office of the Interconnection. (b) The Office of the Interconnection shall implement the dispatch of energy from other pool-dispatched resource increments, including generation increments from Capacity Resources the remaining increments of which are self- scheduled, by sending appropriate signals and instructions to the entity controlling such resources, in accordance with the PJM Manuals. Each Market Seller shall ensure that the entity controlling a pool-dispatched resource offered or made available by that Market Seller complies with the energy dispatch signals and instructions transmitted by the Office of the Interconnection. 1.11.3A MAXIMUM GENERATION EMERGENCY If the Office of the Interconnection declares a Maximum Generation Emergency, all deliveries to load that is served by Point-to-Point Transmission Service outside the PJM Control Area from Capacity Resources may be interrupted in order to serve load in the PJM Control Area. 1.11.4 REGULATION (a) A Market Buyer may satisfy its Regulation obligation from its own resources capable of performing Regulation service, by contractual arrangements with other Market Participants able to provide Regulation service, or by purchases from the PJM Interchange Energy Market. (b) The Office of the Interconnection shall obtain Regulation service from the least-cost alternatives available from either pool-scheduled or self- scheduled resources as needed to meet PJM Control Area requirements not otherwise satisfied by the Market Buyers. (c) The Office of the Interconnection shall dispatch resources for Regulation by sending Regulation signals and instructions to resources from which Regulation service has been offered by Market Sellers, in accordance with the PJM Manuals. Market Sellers shall comply with Regulation dispatch signals and instructions transmitted by the Office of the Interconnection and, in the event of conflict, Regulation dispatch signals and instructions shall take precedence over energy dispatch signals and instructions. Market Sellers shall exert all reasonable efforts to operate, or ensure the operation of, their resources supplying load in the PJM Control Area as close to desired output levels as practical, consistent with Good Utility Practice. 1.11.5 PJM OPEN ACCESS SAME-TIME INFORMATION SYSTEM. The Office of the Interconnection shall update the information posted on the PJM Open Access Same-time Information System to reflect its dispatch of generation resources. 29 2. CALCULATION OF LOCATIONAL MARGINAL PRICES 2.1 INTRODUCTION. The Office of the Interconnection shall calculate the price of energy at the load busses and generation busses in the PJM Control Area and at the interface busses between the PJM Control Area and adjacent Control Areas on the basis of Locational Marginal Prices. Locational Marginal Prices determined in accordance with this Section shall be calculated every five minutes and integrated hourly values of such calculations shall be the basis of sales and purchases of energy in the PJM Interchange Energy Market and of Transmission Congestion Charges under the PJM Tariff. 2.2 GENERAL. The Office of the Interconnection shall determine the least cost security- constrained dispatch, which is the least costly means of serving load at different locations in the PJM Control Area based on actual operating conditions existing on the power grid and on the prices at which Market Sellers have offered to supply energy in the PJM Interchange Energy Market. Locational Marginal Prices for the generation and load busses in the PJM Control Area, including interconnections with other Control Areas, will be calculated based on the actual economic dispatch and the prices of energy offers. The process for the determination of Locational Marginal Prices shall be as follows: (a) To determine actual operating conditions on the power grid in the PJM Control Area, the Office of the Interconnection shall use a computer model of the interconnected grid that uses available metered inputs regarding generator output, loads, and power flows to model remaining flows and conditions, producing a consistent representation of power flows on the network. The computer model employed for this purpose, referred to as the State Estimator program, is a standard industry tool and is described in Section 2.3 below. It will be used to obtain information regarding the output of generation supplying energy to the PJM Control Area, loads at buses in the PJM Control Area, transmission losses, and power flows on binding transmission constraints for use in the calculation of Locational Marginal Prices. Additional information used in the calculation, including Dispatch Rates and real time schedules for external transactions between PJM and other Control Areas, will be obtained from the Office of the Interconnection's dispatchers. (b) Using the prices at which energy is offered by Market Sellers to the PJM Interchange Energy Market, the Office of the Interconnection shall determine the offers of energy that will be considered in the calculation of Locational Marginal Prices. As described in Section 2.4 below, every offer of energy by a Market Seller from a resource that is following economic dispatch instructions of the Office of the Interconnection will be utilized in the calculation of Locational Marginal Prices. (c) Based on the system conditions on the PJM power grid, determined as described in (a), and the eligible energy offers, determined as described in (b), the Office of the Interconnection shall determine the least costly means of obtaining energy to serve the next increment of load at each bus in the PJM Control Area, in the manner described in Section 2.5 below. The result of that calculation shall be a set of Locational Marginal Prices based on the system conditions at the time. 30 2.3 DETERMINATION OF SYSTEM CONDITIONS USING THE STATE ESTIMATOR. Power system operations, including, but not limited to, the determination of the least costly means of serving load, depend upon the availability of a complete and consistent representation of generator outputs, loads, and power flows on the network. In calculating Locational Marginal Prices, the Office of the Interconnection shall obtain a complete and consistent description of conditions on the electric network in the PJM Control Area by using the most recent power flow solution produced by the State Estimator, which is also used by the Office of the Interconnection for other functions within power system operations. The State Estimator is a standard industry tool that produces a power flow model based on available real-time metering information, information regarding the current status of lines, generators, transformers, and other equipment, bus load distribution factors, and a representation of the electric network, to provide a complete description of system conditions, including conditions at busses for which real-time information is unavailable. The current version of the State Estimator includes over 1600 busses in the PJM Control Area, as well as interface busses with adjacent Control Areas. The Office of the Interconnection shall obtain a State Estimator solution every five minutes, which shall provide the megawatt output of generators and the loads at busses in the PJM Control Area, transmission line losses, and actual flows or loadings on constrained transmission facilities. External transactions between PJM and other Control Areas shall be included in the Locational Marginal Price calculation on the basis of the real time transaction schedules implemented by the Office of the Interconnection's dispatcher. 2.4 DETERMINATION OF ENERGY OFFERS USED IN CALCULATING LOCATIONAL MARGINAL PRICES. (a) To determine the energy offers submitted to the PJM Interchange Energy Market that shall be used to calculate the Locational Marginal Prices, the Office of the Interconnection shall determine which resources are following its economic dispatch instructions. A resource will be considered to be following economic dispatch instructions and shall be included in the calculation of Locational Marginal Prices if: i) the price bid by a Market Seller for energy from the resource is less than or equal to the Dispatch Rate for the area of the PJM Control Area in which the resource is located; or ii) the resource is specifically requested to operate by the Office of the Interconnection's dispatcher. (b) In determining whether a resource satisfies the condition described in (a), the Office of the Interconnection will determine the bid price associated with an energy offer by comparing the actual megawatt output of the resource with the Market Seller's offer price curve. Because of practical generator response limitations, a resource whose megawatt output is not ten percent more than the megawatt level specified on the offer price curve for the applicable Dispatch Rate shall be deemed to be following economic dispatch instructions, but the energy price offer used in the calculation of Locational Marginal Prices shall not exceed the applicable Dispatch Rate. Units that must be run for local area protection shall not be considered in the calculation of Locational Marginal Prices. 31 2.5 CALCULATION OF LOCATIONAL MARGINAL PRICES. (a) The Office of the Interconnection shall determine the least costly means of obtaining energy to serve the next increment of load at each bus in the PJM Control Area represented in the State Estimator and each interface bus between the PJM Control Area and an adjacent Control Area, based on the system conditions described by the most recent power flow solution produced by the State Estimator program and the energy offers determined to be eligible for consideration under Section 2.4. This calculation shall be made by applying an incremental linear optimization method to minimize energy costs, given actual system conditions, a set of energy offers, and any binding transmission constraints that may exist. In performing this calculation, the Office of the Interconnection shall calculate the cost of serving an increment of load at each bus from each resource associated with an eligible energy offer as the sum of: (1) the price at which the Market Seller has offered to supply an additional increment of energy from the resource, and (2) the effect on transmission congestion costs (whether positive or negative) associated with increasing the output of the resource, based on the effect of increased generation from that resource on transmission line loadings. The energy offer or offers that can serve an increment of load at a bus at the lowest cost, calculated in this manner, shall determine the Locational Marginal Price at that bus. (b) The calculation set forth in (a) shall be performed every five minutes, using the Office of the Interconnection's Locational Marginal Price program, producing a set of Locational Marginal Prices based on system conditions during the preceding interval. The prices produced at five-minute intervals during an hour will be integrated to determine the Locational Marginal Prices for that hour, which will determine prices in the PJM Interchange Energy Market and Transmission Congestion Costs under the PJM Tariff. 2.6 PERFORMANCE EVALUATION. The Office of the Interconnection shall undertake an evaluation of the foregoing procedures for the determination of Locational Marginal Prices, as well as the procedures for determining and allocating Fixed Transmission Rights and associated Transmission Congestion Charges and Credits, not less often than every two years, in accordance with the PJM Manuals. To the extent practical, the Office of the Interconnection shall retain all data needed to perform comparisons and other analyses of locational marginal pricing. The Office of the Interconnection shall report the results of its evaluation to the Market Participants, along with its recommendations, if any, for changes in the procedures. 32 3. ACCOUNTING AND BILLING 3.1 INTRODUCTION. This schedule sets forth the accounting and billing principles and procedures for the purchase and sale of services on the PJM Interchange Energy Market and for the operation of the PJM Control Area. 3.2 MARKET BUYERS. 3.2.1 SPOT MARKET ENERGY. (a) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate the load payment for each Market Buyer's load bus. The load payment at each bus shall be the product of the Market Buyer's megawatts of load at such load bus in the hour times the Locational Marginal Price at the bus. The megawatts of load at each load bus shall be the sum of the megawatts of load for that bus of that Market Buyer as determined by the State Estimator, plus an allocated share of transmission losses, plus any megawatts of that Market Buyer's bilateral sales to purchasers outside the PJM Control Area attributable to that bus. The total load payment for each Market Buyer shall be the sum of the load payments for each of a Market Buyer's load busses. (b) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate the generation revenue for each Generating Market Buyer's generation bus. The generation revenue at each generation bus shall be the product of the Generating Market Buyer's megawatts of generation at such generation bus in the hour times the Locational Marginal Price at the bus. The megawatts of generation at each generation bus shall be the sum of the megawatts of generation for that bus of that Generating Market Buyer as determined by the State Estimator, plus any megawatts of bilateral purchases of that Generating Market Buyer from sellers outside the PJM Control Area attributable to that bus. The total generation revenue for each Generating Market Buyer shall be the sum of the generation revenues for each of the Generating Market Buyer's generation busses. (c) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate a net bill for each Market Buyer, determined as the difference between its total load payment and its total generation revenue. The portions of the net bill attributable to net hourly PJM Interchange and to Transmission Congestion Charges shall be determined as set forth below. (d) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate the total amount of net hourly PJM Interchange for each Market Buyer, including Generating Market Buyers, in accordance with the PJM Manuals. For Internal Market Buyers that are Load Serving Entities or purchasing on behalf of Load Serving Entities, this calculation shall include determination of the net energy flows from: (i) tie lines; (ii) any generation resource the output of which is controlled by the Market Buyer but delivered to it over another entity's Transmission Facilities; (iii) any generation resource the output of which is controlled by another entity but which is directly interconnected with the Market Buyer's transmission system; (iv) deliveries pursuant to bilateral energy sales; (v) receipts pursuant to bilateral energy purchases; and (vi) the Market Buyer's allocated share of energy purchased from another Control Area in connection with a Minimum Generation 33 Emergency in such other Control Area as specified in Section 3.2.6(c). For Electric Distributors that report hourly net energy flows from metered tie lines, this calculation also shall include 500 kV transmission losses and Inadvertent Interchange allocated to the Electric Distributor and shall exclude the energy delivered to load of other Network Customers and Transmission Customers. For External Market Buyers and Internal Market Buyers that are not Load Serving Entities or purchasing on behalf of Load Serving Entities, this calculation shall determine the energy delivered pursuant to the Market Buyer's purchase requests. (e) The Office of the Interconnection shall calculate Locational Marginal Prices for each load and generation bus in the PJM Control Area, in accordance with Section 2 of this Schedule. (f) An Internal Market Buyer shall be charged for Spot Market Energy purchases to the extent of its hourly net PJM Interchange Imports, determined as specified above. An External Market Buyer shall be charged for its Spot Market Energy purchases based on the energy delivered to it, determined as specified above. The Office of the Interconnection shall calculate an hourly weighted average Locational Marginal Price for each such Market Buyer, based on the Locational Marginal Price at each load bus and the Market Buyer's load at that bus. The total charge shall be the Market Buyer's total net PJM Interchange Imports times the weighted average Locational Marginal Price. (g) A Generating Market Buyer shall be credited as a Market Seller for sales of Spot Market Energy to the extent of its hourly net PJM Interchange Exports, determined as specified above. The total credit shall be the sum of the credits determined by the product of (i) the hourly net amount of energy of PJM Interchange Exports at the applicable generation bus from each of the Generating Market Buyer's generation resources determined to be making such deliveries, times (ii) the hourly Locational Marginal Price at that generation bus. The generation resources determined to be making deliveries into PJM Interchange of such Generating Market Buyer shall be those that have the highest Locational Marginal Prices of the Market Seller's generation resources. 3.2.2 REGULATION. (a) Each Internal Market Buyer that is a Load Serving Entity shall have an hourly Regulation objective equal to its pro rata share of the PJM Control Area Regulation requirements for the hour, based on the Market Buyer's total load in the PJM Control Area for the hour. (b) A Generating Market Buyer supplying Regulation at the direction of the Office of the Interconnection in excess of its hourly Regulation obligation shall be credited for each increment of such Regulation at the price in that hour for the Regulation Class from which 34 the Regulation was supplied, as determined by the Office of the Interconnection in accordance with procedures specified in the PJM Manuals. An Internal Market Buyer that does not meet its hourly Regulation obligation shall be charged for Regulation dispatched by the Office of the Interconnection to meet such obligation at the average price paid by the Office of the Interconnection for Regulation. 3.2.3 OPERATING RESERVES. (a) A Market Seller's pool-scheduled resources capable of providing operating reserves shall be credited as specified below based on the prices offered for the operation of such resource, provided that the resource was available for the entire time specified in the Offer Data for such resource. (b) At the end of each Operating Day, the following determination shall be made for each synchronized pool-scheduled resource of each Market Seller: the total offered price for start-up and no-load fees and Spot Market Energy, determined on the basis of the resource's actual output or available and requested time and type of operation, shall be compared to the total value of that resource's Spot Market Energy. If the total offered price exceeds the total value, the difference shall be credited to the Market Seller. Market Sellers shall also be credited on the basis of their offered prices for synchronized condensing for any hydropower or combustion turbine units operated as synchronous condensers at the request of Office of the Interconnection but producing no energy. (c) The sum of the foregoing credits, plus any cancellation fees paid in accordance with Section 1.10.2(d), less any payments received from another Control Area for Operating Reserves, shall be the cost of Operating Reserves for the PJM Control Area for each Operating Day. (d) The cost of Operating Reserves for each Operating Day shall be allocated and charged to each Market Participant in proportion to the sum of its (i) deliveries of energy to load in the PJM Control Area in megawatt-hours during that Operating Day; and (ii) deliveries of energy sales from within the PJM Control Area to load outside the PJM Control Area in megawatt-hours during that Operating Day, but not including its bilateral transactions for delivery to load outside the PJM Control Area for which it elected pursuant to Section 1.10.1(d)(iv) not to receive Spot Market Backup or, until such times as Section 1.10.1(d)(iv) applies to Capacity Resources, its bilateral transactions for Capacity Resources to load outside the PJM Control Area. 3.2.4 TRANSMISSION CONGESTION. Each Market Buyer shall be charged or credited for Transmission Congestion Charges as specified in Section 5 of this Schedule. 3.2.5 TRANSMISSION LOSSES. (a) Whenever the Office of the Interconnection has in place appropriate computer hardware, software, and other necessary resources to account for marginal losses in the dispatch of energy and the calculation of Locational Marginal Prices, loss accounting shall be determined on that basis, and the provisions of this Section shall be revised accordingly. Until such time, the following accounting provisions for losses shall apply. 35 (b) Each Internal Market Buyer that is a Load Serving Entity or purchasing on behalf of a Load Serving Entity shall be credited in an amount equal to its pro rata share of the hourly total amounts collected from Transmission Customers either as charges for transmission losses in the PJM Control Area as specified in Section 3.4.2 or for transmission losses supplied in kind in accordance with Section 3.4.2(c) based on the Locational Marginal 35a Price at the interface where such losses were delivered. This credit shall be determined by the ratio of the Internal Market Buyer's total hourly load, divided by the total hourly load in the PJM Control Area. (c) PJM Control Area 500 kV losses shall be allocated to each Electric Distributor that reports hourly net energy flows from metered tie lines in proportion to its hourly load in the PJM Control Area. 3.2.6 EMERGENCY ENERGY. (a) Internal Market Buyers shall be allocated a proportionate share of the net cost of Emergency energy purchased by the Office of the Interconnection. Such allocated share shall be determined in proportion to the amount of net PJM Interchange Imports by each Internal Market Buyer during the hour of each such energy purchase. (b) Net revenues in excess of Locational Marginal Prices attributable to sales of energy in connection with Emergencies to other Control Areas shall be credited to Internal Market Buyers in proportion to the amount of net PJM Interchange Imports by each Internal Market Buyer during each hour of such energy sales. (c) The costs, revenues, and energy associated with hourly energy purchased from another Control Area in connection with a Minimum Generation Emergency in such other Control Area, shall be allocated to each Internal Market Buyer in proportion to its load in the PJM Control Area during the hour of such purchases. 3.2.7 BILLING. (a) The Office of the Interconnection shall prepare a billing statement each billing cycle for each Market Buyer in accordance with the charges and credits specified in Sections 3.2.1 through 3.2.6 of this Schedule, and showing the net amount to be paid or received by the Market Buyer. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Market Buyer's internal accounting. (b) If deliveries to a Market Buyer that has PJM Interchange meters in accordance with Section 14 of the Operating Agreement include amounts delivered for a Market Participant that does not have PJM Interchange meters separate from those of the metered Market Buyer, the Office of the Interconnection shall prepare a separate billing statement for the unmetered Market Participant based on the allocation of deliveries agreed upon between the Market Buyer and the unmetered Market Participant specified by them to the Office of the Interconnection. 3.3 MARKET SELLERS. Except as provided in the following sentence, the accounting and billing principles and procedures applicable to Generating Market Buyers functioning as Market Sellers shall be as set forth in Section 3.2. This Section sets forth the accounting and billing principles and procedures applicable to all other Market Sellers, and to Generating Market Buyers functioning as Market Sellers with respect to any matters not specified in Section 3.2. 36 3.3.1 SPOT MARKET ENERGY. (a) At the end of each hour during an Operating Day, the Office of the Interconnection shall determine the total net amount of hourly energy delivered to the PJM Control Area by each pool-scheduled or pool-dispatched resource of each Market Seller, in accordance with the PJM Manuals and the calculation described in Section 3.2.1(d). (b) The Office of the Interconnection shall calculate Locational Marginal Prices for each generation and load bus in the PJM Control Area, including the bus at each point of interconnection between the PJM Control Area and each adjacent Control Area, in accordance with Section 2 of this Schedule. (c) A Market Seller shall be credited for sales of Spot Market Energy to the extent of its hourly net deliveries of energy to the PJM Control Area from the Market Seller's pool-scheduled or pool-dispatched resources. For pool- scheduled resources that are External Resources, the Office of the Interconnection shall model, based on an appropriate flow analysis, the hourly amounts delivered from each such resource to the corresponding interface point between the PJM Control Area and adjacent Control Areas. The total credit for each Market Seller shall be the sum of its credits determined by the product of (i) the hourly net amount of energy delivered to the PJM Control Area at the applicable generation or interface bus from each of the Market Seller's pool- scheduled or pool-dispatched resources, times (ii) the hourly Locational Marginal Price at that bus. 3.3.2 REGULATION. Each Market Seller that is also an Internal Market Buyer shall have an hourly Regulation objective as specified in Section 3.2.2(a), and shall be credited or charged in connection therewith as specified in Section 3.2.2(b). All other Market Sellers supplying Regulation at the direction of the Office of the Interconnection shall be credited for each increment of such Regulation at the price in that hour for the Regulation Class from which the Regulation was supplied, as determined by the Office of the Interconnection in accordance with procedures specified in the PJM Manuals. 3.3.3 OPERATING RESERVES. A Market Seller shall be credited for its pool-scheduled resources based on the prices offered for the operation of such resource, provided that the resource was available for the entire time specified in the Offer Data for such resource, in accordance with the procedures set forth in Section 3.2.3(b). 3.3.4 EMERGENCY ENERGY. The costs and net revenues associated with hourly energy sales to other Control Areas in connection with a Minimum Generation Emergency in the PJM Control Area shall be allocated to Market Sellers in proportion to their sales to the PJM Interchange Energy Market from generation resources within the metered boundaries of the PJM Control Area in each hour in which such energy was sold to other Control Areas. 37 3.3.5 BILLING. The Office of the Interconnection shall prepare a billing statement each billing cycle for each Market Seller in accordance with the charges and credits specified in Sections 3.3.1 through 3.3.4 of this Schedule, and showing the net amount to be paid or received by the Market Seller. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Market Seller's internal accounting. 3.4 TRANSMISSION CUSTOMERS. 3.4.1 TRANSMISSION CONGESTION. Each Transmission Customer shall be charged and credited for Transmission Congestion Charges as specified in Section 5 of this Schedule. 3.4.2 TRANSMISSION LOSSES (a) Whenever the Office of the Interconnection has in place appropriate computer hardware, software, and other necessary resources to account for marginal losses in the dispatch of energy and the calculation of Locational Marginal Prices, loss accounting shall be determined on that basis, and the provisions of this Section shall be revised accordingly. Until such time, the following accounting provisions for losses shall apply. (b) Transmission Customers shall be charged for transmission losses in an amount equal to the product of (i) the Transmission Customer's megawatt-hours of deliveries using Point-to-Point Transmission Service, times (ii) the appropriate loss factor for deliveries using Point-to-Point Transmission Service, times (iii) the weighted average Locational Marginal Price for all load busses in the PJM Control Area. The foregoing average hourly loss factor shall be: (i) determined by the Office of the Interconnection from time to time as conditions affecting losses shall warrant; and (ii) calculated separately for on-peak and off-peak hours on the basis of the average ratio of losses to load served in each such period. (c) A Transmission Customer may elect to pay for losses in kind, rounded off to the nearest whole megawatt, rather than as specified above if its total deliveries in an hour using Point-to-Point Transmission Service are greater than 200 megawatts. If it so elects, the Transmission Customer's specified source for the energy to be delivered using Point-to-Point Transmission Service may be scheduled to supply to the PJM Control Area boundary an amount of energy equal to the delivery schedule plus the amount of losses determined by applying the appropriate hourly loss factor as specified above to the delivered amount. 3.4.3 BILLING. The Office of the Interconnection shall prepare a billing statement each billing cycle for each Transmission Customer in accordance with the charges and credits specified in Sections 3.4.1 through 3.4.2 of this Schedule, and showing the net amount to be paid or received by the Transmission Customer. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Transmission Customer's internal accounting. 38 3.5 OTHER CONTROL AREAS. 3.5.1 ENERGY SALES. To the extent appropriate in accordance with Good Utility Practice, the Office of the Interconnection may sell energy to an interconnected Control Area as necessary to alleviate or end an Emergency in that Control Area. Such sales shall be made (i) only to Control Areas that have undertaken a commitment pursuant to a written agreement with the LLC to sell energy on a comparable basis to the PJM Control Area, and (ii) only to the extent consistent with the maintenance of reliability in the PJM Control Area. The Office of the Interconnection may decline to make such sales to a Control Area that the Office of the Interconnection determines does not have in place and implement Emergency procedures that are comparable to those followed in the PJM Control Area. If the Office of the Interconnection sells energy to an interconnected Control Area as necessary to alleviate or end an Emergency in that Control Area, such energy shall be sold at 150% of the Locational Marginal Price at the bus or busses at the border of the PJM Control Area at which such energy is delivered. 3.5.2 OPERATING MARGIN SALES. The extent appropriate in accordance with Good Utility Practice, the Office of the Interconnection may sell Operating Margin to an interconnected Control Area as requested to alleviate an operating contingency resulting from the affect of the purchasing Control Area's operations on the dispatch of resources in the PJM Control Area. Such sales shall be made only to Control Areas that have undertaken a commitment pursuant to a written agreement with the Office of the Interconnection (i) to purchase Operating Margin whenever the purchasing Control Area's operations will affect the dispatch of resources in the PJM Control Area, and (ii) to sell Operating Margin on a comparable basis to the LLC. 3.5.3 TRANSMISSION CONGESTION. Each Control Area purchasing Operating Margin shall be assessed Transmission Congestion Charges as specified in Section 5.1.5 of this Schedule. 3.5.4 BILLING. The Office of the Interconnection shall prepare a billing statement each billing cycle for each Control Area to which Emergency energy or Operating Margin was sold, and showing the net amount to be paid by such Control Area. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts. 3.6 METERING RECONCILIATION. 3.6.1 METER CORRECTION BILLING. Metering errors and corrections will be reconciled at the end of each month by a meter correction charge or credit. The monthly meter correction charge or credit shall be determined by the product of the positive or negative deviation in energy amounts, times the weighted average Locational Marginal Price for all load busses in the PJM Control Area. 39 3.6.2 METER CORRECTIONS BETWEEN MARKET PARTICIPANTS. If a Market Participant or the Office of the Interconnection discovers a meter error affecting an interchange of energy with another Market Participant and makes the error known to such other Market Participant prior to the completion by the Office of the Interconnection of the accounting for the interchange, and if both Market Participants are willing to adjust hourly load records to compensate for the error and such adjustment does not affect other parties, an adjustment in load records may be made by the Market Participants in order to correct for the meter error, provided corrected information is furnished to the Office of the Interconnection in accordance with the Office of the Interconnection's accounting deadlines. No such adjustment may be made if the accounting for the Operating Day in which the interchange occurred has been completed by the Office of the Interconnection. 3.6.3 500 KV METER ERRORS. Billing cycle accounting for 500 kV transmission losses shall be adjusted to account for errors in meters on 500 kV Transmission Facilities. 3.6.4 METER CORRECTIONS BETWEEN CONTROL AREAS. An error between accounted for and metered interchange between a Party in the PJM Control Area and an entity in another Control Area shall be corrected by adjusting the hourly meter readings. If this is not practical, the error shall be accounted for by a correction at the end of the billing cycle. The Market Participant with ties to such other Control Area experiencing the error shall account for the full amount of the discrepancy and an appropriate debit or credit shall be applied equally among all Market Buyers. The Office of the Interconnection will adjust the actual interchange between the PJM Control Area and the other Control Area to maintain a proper record of inadvertent energy flow. Meter corrections on the 500 kV system between the PJM Control Area and other Control Areas shall be accounted for through the internal 500 kV system meter error allocation at the end of the billing cycle. 3.6.5 METER CORRECTION DATA. Meter error data shall be submitted to the Office of the Interconnection not later than noon on the second working day of the Office of the Interconnection after the end of the billing cycle applicable to the meter correction. 3.6.6 CORRECTION LIMITS. A Market Participant may not assert a claim for an adjustment in billing as a result of a meter error for any error discovered more than two years after the date on which the metering occurred. Any claim for an adjustment in billing as a result of a meter error shall be limited to bills for transactions occurring in the most recent annual accounting period of the billing Market Participant in which the meter error occurred, and the prior annual accounting period. 40 4. RATE TABLE 4.1 OFFERED PRICE RATES. Spot Market Energy, Regulation, Operating Reserve, and Transmission Congestion are based on offers to the Office of the Interconnection specified in this Agreement. 4.2 TRANSMISSION LOSSES. Average loss factors shall be as specified in the PJM Tariff. 4.3 EMERGENCY ENERGY PURCHASES. The pricing for Emergency energy purchases will be determined by the Office of the Interconnection and: (a) an adjacent Control Area, in accordance with an agreement between the Office of the Interconnection and such adjacent Control Area, or (b) a Member, in accordance with arrangements made by the Office of Interconnection to purchase energy offered by such Member from resources that are not Capacity Resources. 41 5. CALCULATION OF TRANSMISSION CONGESTION CHARGES AND CREDITS 5.1 TRANSMISSION CONGESTION CHARGE CALCULATION 5.1.1 CALCULATION BY OFFICE OF THE INTERCONNECTION. When the transmission system is operating under constrained conditions, the Office of the Interconnection shall calculate Transmission Congestion Charges for each Network Service User, the PJM Interchange Energy Market, and each Transmission Customer. 5.1.2 GENERAL. The basis for the Transmission Congestion Charges shall be the Locational Marginal Prices determined in accordance with Section 2 of this Schedule. 5.1.3 NETWORK SERVICE USER CALCULATION. Each Network Service User shall be charged for the increased cost of energy incurred by it during each constrained hour to deliver the output of its firm Capacity Resources or other owned or contracted for resources, its firm bilateral purchases, and its non-firm bilateral purchases as to which it has elected to pay Transmission Congestion Charges. The Transmission Congestion Charge for deliveries from each such source shall be the Network Service User's hourly net bill less its hourly net PJM Interchange payments or sales as determined in accordance with Section 3.2.1 or Sections 3.3 and 3.3.1 of this Schedule. 5.1.4 TRANSMISSION CUSTOMER CALCULATION. Each Transmission Customer using Firm Point-to-Point Transmission Service (as defined in the PJM Tariff), and each Transmission Customer using Non-Firm Point-to-Point Transmission Service (as defined in the PJM Tariff) that has elected to pay Transmission Congestion Charges, shall be charged for the increased cost of energy during constrained hours for the delivery of energy using Point-to-Point Transmission Service. The Transmission Congestion Charge for each such delivery shall be the delivery amount multiplied by the difference between the Locational Marginal Price at the delivery interface and the Locational Marginal Price at the source interface, or for Market Sellers using point-to-point transmission service for deliveries out of the PJM Control Area from generating resources within the PJM Control Area shall be the amount of its net bill less its net hourly PJM Interchange payments or sales as determined in accordance with Section 3.3 of this Schedule. 5.1.5 OPERATING MARGIN CUSTOMER CALCULATION. Each Control Area purchasing Operating Margin shall be assessed Transmission Congestion Charges for any the increase in the cost of energy resulting from the provision of Operating Margin. The Transmission Congestion Charge shall be the amount of Operating Margin purchased in an hour multiplied by the difference in the Locational Marginal Price at what would be the delivery interface and the Locational Marginal Price at what would be the source interface, if the operating contingency that was the basis for the purchase of Operating Margin had occurred in that hour. Operating Margin may be allocated among multiple source and delivery interfaces in accordance with an applicable load flow study. 42 5.1.6 TRANSMISSION LOADING RELIEF CUSTOMER CALCULATION (a) Each Transmission Loading Relief Customer shall be assessed Transmission Congestion Charges for any increase in the cost of energy in the PJM Control Area resulting from its energy schedules over contract paths outside the PJM Control Area during Transmission Loading Relief. (b) The Transmission Congestion Charge shall be the total amount of energy specified in such energy schedules multiplied by the difference between a Locational Marginal Price calculated by the Office of the Interconnection for the energy schedule source location specified in the NERC Interchange Distribution Calculator and a Locational Marginal Price calculated by the Office of the Interconnection for the energy schedule sink location specified in the NERC Interchange Distribution Calculator. Transmission Congestion Charges that are less than zero shall be set equal to zero for Transmission Loading Relief Customers. (c) The Office of the Interconnection will determine the Locational Marginal Prices at the energy schedule source and sink locations external to PJM with reference to and based solely on the prices of energy in the PJM Control Area and at the interface buses between the PJM Control Area and adjacent Control Areas and the system conditions and actual power flow distributions as described by the PJM State Estimator program. The Office of the Interconnection will determine the Locational Marginal Prices at the external energy schedule source and sink locations and the resulting Congestion Charge based on the portion of the energy schedule that flows through the PJM Control Area as reflected by the flow distributions from the PJM State Estimator program. 5.1.7 TOTAL TRANSMISSION CONGESTION CHARGES. The total Transmission Congestion Charges collected by the Office of the Interconnection each hour will be the sum of the amounts determined as specified in this Schedule. The Office of the Interconnection shall collect Transmission Congestion Charges for each hour the transmission system operates under constrained conditions. 5.2 TRANSMISSION CONGESTION CREDIT CALCULATION. 5.2.1 ELIGIBILITY. Each Transmission Customer using firm Point-to-Point Transmission Service and each Network Service User shall receive as a Transmission Congestion Credit a proportional share of the total Transmission Congestion Charges collected for each constrained hour. 5.2.2 FIXED TRANSMISSION RIGHTS (a) Transmission Congestion Credits will be calculated based upon the Fixed Transmission Rights of each Network Service User and Transmission Customer, determined as specified below. 43 (b) Each Network Service User shall designate a subset of its Network Resources for which Fixed Transmission Rights will be assigned. The sum of the Fixed Transmission Right for each Network Resource shall be a number of megawatts equal to or less than the installed capacity summer megawatt rating of each designated Network Resource, determined at the PJM Control Area transmission bus at which the designated Network Resource is connected. Each Fixed Transmission Right shall be to the aggregate load busses of the Network Service User in a Zone or, with respect to Non-Zone Network Load, to the border of the PJM Control Area. The sum of each Network Service User's Fixed Transmission Rights for a Zone must be equal to or less than the Network Service User's peak load for that Zone as determined under Section 34.1 of the Tariff. The sum of each Network Service User's Fixed Transmission Rights for Non-Zone Network Load must be equal to or less than the Network Service User's transmission responsibility for Non-Zone Network Load as determined under Section 34.1 of the Tariff. (c) Each Transmission Customer receiving firm Point-to-Point Transmission Service shall be assigned Fixed Transmission Rights; provided, however, that a Transmission Customer may notify the Office of Interconnection that it does not wish to receive any FTRs or wishes to receive FTRs only for certain Point or Points of Receipt and Point or Points of Delivery, in which even no FTRs or such reduced amount of FTRs shall be issued to the Transmission Customer. The Fixed Transmission Right for each instance of Point-to-Point Transmission Service shall be a number of megawatts equal to the megawatts of firm service being provided between the receipt and delivery points as to which the Transmission Customer has firm Point-to-Point Transmission Service. (d) The foregoing assignment of Fixed Transmission Rights shall be enhanced by an amendment to this Schedule, to be filed with FERC not later than December 31, 1997, that will provide for an auction of Fixed Transmission Rights over and above those FTRs obtained and retained by Network Service Users and Transmission Customers then receiving firm Point-to-Point Transmission Service (including firm Point-to-Point transmission service for existing bilateral contracts), such auction to be implemented as soon after December 31, 1997 as shall be determined by the Office of the Interconnection to be reasonably practical. For so long as Fixed Transmission Rights are assigned on the basis of Network Transmission Service and firm Point-to-Point Transmission Service, any Fixed Transmission Rights awarded pursuant to an auction shall be simultaneously feasible with all Network Transmission Service and firm Point-to-Point Transmission Service obligations. The Members specified in Section 11.5(c) of the Agreement, working with the Office of the Interconnection, shall develop the details of the implementation of such an auction, including but not limited to the nature of the bidding process, the frequency of auctions, and the duration of the Fixed Transmission Rights purchased at auction. 43a 5.2.4 TARGET ALLOCATION FOR NETWORK SERVICE USERS. A target allocation of Transmission Congestion Credits for each Network Service User shall be determined for each of its Fixed Transmission Rights. Each Fixed Transmission Right shall be multiplied by the percent of the Network Service User's annual peak load assigned to each load bus multiplied by the difference calculated as the Network Service User's load bus Locational Marginal Price minus the generation bus Locational Marginal Price of the Network Resource associated with the Fixed Transmission Right. The total target allocation for each Fixed Transmission Right is the sum of the target allocations for each load bus. The total target allocation for each Network Service User for each hour is the sum of the total target allocations for each of the Network Service User's Fixed Transmission Rights. 5.2.4 TARGET ALLOCATION FOR OTHER HOLDERS. A target allocation of Transmission Congestion Credits for each Transmission Customer or entity holding an FTR acquired by other means shall be determined for each Fixed Transmission Right. Each Fixed Transmission Right shall be multiplied by the hourly Locational Marginal Price differences for the receipt and delivery points associated with the Fixed Transmission Right, calculated as the Locational Marginal Price at the delivery point(s) minus the Locational Marginal Price at the receipt point(s). The total target allocation for the Transmission Customer for each hour shall be the sum of the target allocations associated with all of the Transmission Customer's Fixed Transmission Rights. 5.2.5 CALCULATION OF TRANSMISSION CONGESTION CREDITS (a) The total of all the target allocations determined as specified above shall be compared to the total Transmission Congestion Charges in each hour. If the total of the target allocations is less than the total of the Transmission Congestion Charges, the Transmission Congestion Credit for each Network Service User and Transmission Customer shall be equal to its target allocation. All remaining Transmission Congestion Charges shall be distributed as described below in Section 5.2.6 "Distribution of Excess Congestion Charges." (b) If the total of the target allocations is greater than the total Transmission Congestion Charges for the hour, each holder of Fixed Transmission Rights shall receive a share of the total Transmission Congestion Charges in proportion to its target allocations. 5.2.6 DISTRIBUTION OF EXCESS CONGESTION CHARGES (a) Excess Transmission Congestion Charges accumulated in a month shall be distributed to each holder of Fixed Transmission Rights in proportion to, but not more than, any deficiency in the share of Transmission Congestion Charges received by the holder during that month as compared to its total target allocations for the month. (b) Any excess Transmission Congestion Charges remaining at the end of a month shall be distributed to Network Service Users and Transmission Customers purchasing Firm Point-to-Point Transmission Service in proportion to their Demand Charges for Network Service and their charges for Reserved Capacity for Firm Point-to-Point Transmission Service. 44 5.3 UNSCHEDULED TRANSMISSION SERVICE (LOOP FLOW) (a) When there are agreements between the Members (or the Office of the Interconnection on behalf of the Members) and others for compensation to be paid or received for unscheduled transmission service (loop flow) into or out of the PJM Control Area, the net compensation received shall be included in the total Transmission Congestion Charges that are distributed in accordance with Section 5.2. (b) With respect to payments by the Office of the Interconnection to the New York Power Pool for the installation and operation of phase angle regulating facilities at Ramapo to control or limit unscheduled transmission service (loop flow), each Transmission Owner with revenue requirements under the PJM Tariff shall pay a share of the charges on a transmission revenue requirements ratio share basis. 44a SCHEDULE 1 ---------- PJM INTERCHANGE ENERGY MARKET ----------------------------- (Revises and replaces former Schedules 7.01 and 7.03) Issued: June 2, 1997 Effective: April 1, 1998 1. MARKET OPERATIONS 1.1 INTRODUCTION. This Schedule sets forth the scheduling, other procedures, and certain general provisions applicable to the operation of the PJM Interchange Energy Market within the PJM Control Area. This Schedule addresses each of the three time-frames pertinent to the daily operation of the PJM Interchange Energy Market: Prescheduling, Scheduling, and Dispatch. 1.2 COST-BASED OFFERS. Unless and until the FERC shall authorize the use of market-based prices in the PJM Interchange Energy Market, all offers for energy or other services to be sold on the PJM Interchange Energy Market from generating resources located within the PJM Control Area shall not exceed the variable cost of producing such energy or other service, as determined in accordance with Schedule 2 to this Agreement and applicable regulatory standards, requirements and determinations; provided that, a Market Seller may offer to the PJM Interchange Energy Market the right to call on energy from a resource the output of which has been sold on a bilateral basis, with the rate for such energy if called equal to the curtailment rate specified in the bilateral contract. 1.3 DEFINITIONS. 1.3.1 DISPATCH RATE. "Dispatch Rate" shall mean the control signal, expressed in dollars per megawatt-hour, calculated and transmitted continuously and dynamically to direct the output level of all generation resources dispatched by the Office of the Interconnection in accordance with the Offer Data. 1.3.2 EQUIVALENT LOAD. "Equivalent Load" shall mean the sum of a Market Participant's net system requirements to serve its customer load in the PJM Control Area, if any, plus its net bilateral transactions. 1.3.3 EXTERNAL MARKET BUYER. "External Market Buyer" shall mean a Market Buyer making purchases of energy from the PJM Interchange Energy Market for consumption by end-users outside the PJM Control Area, or for load in the Control Area that is not served by Network Transmission Service. Revised: June 26, 1998 Effective: September 17, 1998 1.3.4 EXTERNAL RESOURCE. "External Resource" shall mean a generation resource located outside the metered boundaries of the PJM Control Area. 1.3.5 FIXED TRANSMISSION RIGHT. "Fixed Transmission Right" shall mean a number determined as specified in Section 5.2.2 of this Schedule. 1.3.6 GENERATING MARKET BUYER. "Generating Market Buyer" shall mean an Internal Market Buyer that is a Load Serving Entity that owns or has contractual rights to the output of generation resources capable of serving the Market Buyer's load in the PJM Control Area, or of selling energy or related services in the PJM Interchange Energy Market or elsewhere. 1.3.7 GENERATOR FORCED OUTAGE. "Generator Forced Outage" shall mean an immediate reduction in output or capacity or removal from service, in whole or in part, of a generating unit by reason of an Emergency or threatened Emergency, unanticipated failure, or other cause beyond the control of the owner or operator of the facility, as specified in the relevant portions of the PJM Manuals. A reduction in output or removal from service of a generating unit in response to changes in market conditions shall not constitute a Generator Forced Outage. 1.3.8 GENERATOR MAINTENANCE OUTAGE. "Generator Maintenance Outage" shall mean the scheduled removal from service, in whole or in part, of a generating unit in order to perform necessary repairs on specific components of the facility, if removal of the facility meets the guidelines specified in the PJM Manuals. 1.3.9 GENERATOR PLANNED OUTAGE. "Generator Planned Outage" shall mean the scheduled removal from service, in whole or in part, of a generating unit for inspection, maintenance or repair with the approval of the Office of the Interconnection in accordance with the PJM Manuals. 1.3.10 INTERNAL MARKET BUYER. "Internal Market Buyer" shall mean a Market Buyer making purchases of energy from the PJM Interchange Energy Market for ultimate consumption by end- users inside the PJM Control Area that are served by Network Transmission Service. 1.3.11 INADVERTENT INTERCHANGE. "Inadvertent Interchange" shall mean the difference between net actual energy flow and net scheduled energy flow into or out of the PJM Control Area, as determined and allocated each hour by the Office of the Interconnection in accordance with the procedures set forth in the PJM Manuals to each Electric Distributor that reports to the Office of the Interconnection its hourly net energy flows from metered tie lines. 1.3.12 MARKET OPERATIONS CENTER. "Market Operations Center" shall mean the equipment, facilities and personnel used by or on behalf of a Market Participant to communicate and coordinate with the Office of the Interconnection in connection with transactions in the PJM Interchange Energy Market or the operation of the PJM Control Area. 1.3.13 MAXIMUM GENERATION EMERGENCY. "Maximum Generation Emergency" shall mean an Emergency declared by the Office of the Interconnection in which the Office of the Interconnection anticipates requesting one or more Capacity Resources to operate at its maximum net or gross electrical power output, subject to the equipment stress limits for such Capacity Resource, in order to manage, alleviate, or end the Emergency. 1.3.14 MINIMUM GENERATION EMERGENCY. "Minimum Generation Emergency" shall mean an Emergency declared by the Office of the Interconnection in which the Office of the Interconnection anticipates requesting one or more generating resources to operate at or below Normal Minimum Generation, in order to manage, alleviate, or end the Emergency. 1.3.14A NERC INTERCHANGE DISTRIBUTION CALCULATOR. "NERC Interchange Distribution Calculator" shall mean the NERC mechanism that is in effect and being used to calculate the distribution of energy, over specific transmission interfaces, from energy transactions. 1.3.15 NETWORK RESOURCE. "Network Resource" shall have the meaning specified in the PJM Tariff. 1.3.16 NETWORK SERVICE USER. "Network Service User" shall mean an entity using Network Transmission Service. 1.3.17 NETWORK TRANSMISSION SERVICE. "Network Transmission Service" shall mean transmission service provided pursuant to the rates, terms and conditions set forth in Part III of the PJM Tariff, or transmission service comparable to such service that is provided to a Load Serving Entity that is also a Regional Transmission Owner as that term is defined in the PJM Tariff. 1.3.18 NORMAL MAXIMUM GENERATION. "Normal Maximum Generation" shall mean the highest output level of a generating resource under normal operating conditions. 1.3.19 NORMAL MINIMUM GENERATION. "Normal Minimum Generation" shall mean the lowest output level of a generating resource under normal operating conditions. Revised: November 19, 1998 Effective: January 19, 1999 1.3.20 OFFER DATA. "Offer Data" shall mean the scheduling, operations planning, dispatch, new resource, and other data and information necessary to schedule and dispatch generation resources for the provision of energy and other services and the maintenance of the reliability and security of the transmission system in the PJM Control Area, and specified for submission to the PJM Interchange Energy Market for such purposes by the Office of the Interconnection. 1.3.21 OFFICE OF THE INTERCONNECTION CONTROL CENTER. "Office of the Interconnection Control Center" shall mean the equipment, facilities and personnel used by the Office of the Interconnection to coordinate and direct the operation of the PJM Control Area and to administer the PJM Interchange Energy Market, including facilities and equipment used to communicate and coordinate with the Market Participants in connection with transactions in the PJM Interchange Energy Market or the operation of the PJM Control Area. 1.3.22 OPERATING DAY. "Operating Day" shall mean the daily 24 hour period beginning at midnight for which transactions on the PJM Interchange Energy Market are scheduled. Financial Printing GroupFinancial Printing Group AMENDED AND RESTATEDAMENDED AND RESTATED OPERATING AGREEMENT OF PJM INTERCONNECTION, L.L.C. DATED JUNE 2, 1997 (REVISED DECEMBER 31, 1997, JANUARY 26, 1998, JANUARY 30, 1998, MARCH 17, 1998, MAY 15, 1998, JUNE 26, 1998, SEPTEMBER 24, 1998, OCTOBER 14, 1998, OCTOBER 15, 1998, AND NOVEMBER 19, 1998) AMENDED AND RESTATED OPERATING AGREEMENT OF PJM INTERCONNECTION, L.L.C. This Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., dated as of this 2 nd day of June, 1997, amends and restates as of the Effective Date the Operating Agreement of PJM Interconnection, L.L.C. filed with the FERC on April 2, 1997, as amended. WHEREAS, certain of the Members have previously entered into an agreement, originally dated September 26, 1956, as amended and supplemented up to and including December 31, 1996, stating "their respective rights and obligations with respect to the coordinated operation of their electric supply systems and the interchange of electric capacity and energy among their systems" (such agreement as amended and supplemented being referred to as the "Original PJM Agreement"), and which coordinated operations and interchange came to be known as the PJM Interconnection (the "Interconnection"); and WHEREAS, pursuant to a resolution of June 16, 1993, an unincorporated association comprised of the parties to the Original PJM Agreement was formed for the purpose of implementation of the Original PJM Agreement as it then existed and as it subsequently has been amended and supplemented, such association being known as the "PJM Interconnection Association"; and WHEREAS, because of changes in federal law and policy, the Original PJM Agreement, together with other documents and agreements, was amended, restated and submitted to FERC on December 31, 1996 to restructure fundamental aspects of the operation of the Interconnection; and WHEREAS, so that the provisions of the Original PJM Agreement could be placed into effect consistent with a February 28, 1997 order of FERC, including those provisions related to the governance of the Interconnection, the parties to the Original PJM Agreement, along with the other interested parties, approved the conversion of the PJM Interconnection Association into the LLC pursuant to the provisions of the Delaware Limited Liability Company Act, as amended (the "Delaware LLC Act"), pursuant to a Certificate of Formation (the "Certificate of Formation") and a Certificate of Conversion (the "Certificate of Conversion"), each filed with the Delaware Secretary of State (the "Recording Office") on March 31, 1997; and WHEREAS, the Members wish to amend and restate the Operating Agreement of PJM Interconnection, L.L.C. adopted in connection with the formation of the LLC and as in effect immediately prior to the Effective Date in the form set forth below; and WHEREAS, the Members intend to form an Independent System Operator in accordance with the regulations of the Federal Energy Regulatory Commission; and Now, therefore, in consideration of the foregoing, and of the covenants and agreements hereinafter set forth, the Members hereby agree as follows: 1 DEFINITIONS Unless the context otherwise specifies or requires, capitalized terms used in this Agreement shall have the respective meanings assigned herein or in the Schedules hereto for all purposes of this Agreement (such definitions to be equally applicable to both the singular and the plural forms of the terms defined). Unless otherwise specified, all references herein to Sections, Schedules, Exhibits or Appendices are to Sections, Schedules, Exhibits or Appendices of this Agreement. As used in this Agreement: 1.1 ACT. "Act" shall mean the Delaware Limited Liability Company Act, Title 6, 18- 101 to 18-1109 of the Delaware Code. 1.2 AFFILIATE. "Affiliate" shall mean any two or more entities, one of which controls the other or that are under common control. "Control" shall mean the possession, directly or indirectly, of the power to direct the management or policies of an entity. Ownership of publicly-traded equity securities of another entity shall not result in control or affiliation for purposes of this Agreement if the securities are held as an investment, the holder owns (in its name or via intermediaries) less than 10 percent of the outstanding securities of the entity, the holder does not have representation on the entity's board of directors (or equivalent managing entity) or vice versa, and the holder does not in fact exercise influence over day-to-day management decisions. Unless the contrary is demonstrated to the satisfaction of the Members Committee, control shall be presumed to arise from the ownership of or the power to vote, directly or indirectly, ten percent or more of the voting securities of such entity. 1.3 AGREEMENT. "Agreement" shall mean this Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., including all Schedules, Exhibits, Appendices, addenda or supplements hereto, as amended from time to time. 1.4 ANNUAL MEETING OF THE MEMBERS. "Annual Meeting of the Members" shall mean the meeting specified in Section 8.3.1 of this Agreement. 1.5 BOARD MEMBER. "Board Member" shall mean a member of the PJM Board. 1.6 CAPACITY RESOURCE. "Capacity Resource" shall mean the net capacity from owned or contracted for generating facilities all of which (i) are accredited to a Load Serving Entity pursuant to the procedures set forth in the Reliability Assurance Agreement and (ii) are committed to satisfy that Load Serving Entity's obligations under the Reliability Assurance Agreement and this Agreement. 2 1.7 CONTROL AREA. "Control Area" shall mean an electric power system or combination of electric power systems bounded by interconnection metering and telemetry to which a common automatic generation control scheme is applied in order to: (a) match the power output of the generators within the electric power system(s) and energy purchased from entities outside the electric power system(s), with the load within the electric power system(s); (b) maintain scheduled interchange with other Control Areas, within the limits of Good Utility Practice; (c) maintain the frequency of the electric power system(s) within reasonable limits in accordance with Good Utility Practice and the criteria of NERC and the applicable regional reliability council of NERC; (d) maintain power flows on transmission facilities within appropriate limits to preserve reliability; and (e) provide sufficient generating capacity to maintain operating reserves in accordance with Good Utility Practice. 1.8 ELECTRIC DISTRIBUTOR. "Electric Distributor" shall mean a Member that owns or leases with rights equivalent to ownership electric distribution facilities that are used to provide electric distribution service to electric load within the PJM Control Area. 1.9 EFFECTIVE DATE. "Effective Date" shall mean August 1, 1997, or such later date that FERC permits this Agreement to go into effect. 1.10 EMERGENCY. "Emergency" shall mean: (i) an abnormal system condition requiring manual or automatic action to maintain system frequency, or to prevent loss of firm load, equipment damage, or tripping of system elements that could adversely affect the reliability of an electric system or the safety of persons or property; or (ii) a fuel shortage requiring departure from normal operating procedures in order to minimize the use of such scarce fuel; or (iii) a condition that requires implementation of emergency procedures as defined in the PJM Manuals. 1.11 END-USE CUSTOMER. "End-Use Customer" shall mean a Member that is a retail end-user of electricity within the PJM Control Area. 1.12 FERC. "FERC" shall mean the Federal Energy Regulatory Commission or any successor federal agency, commission or department exercising jurisdiction over this Agreement. 3 1.13 FINANCE COMMITTEE. "Finance Committee" shall mean the body formed pursuant to Section 7.5.1 of this Agreement. 1.14 GENERATION OWNER. "Generation Owner" shall mean a Member that owns or leases with rights equivalent to ownership facilities for the generation of electric energy that are located within the PJM Control Area. Purchasing all or a portion of the output of a generation facility shall not be sufficient to qualify a Member as a Generation Owner. 1.15 GOOD UTILITY PRACTICE. "Good Utility Practice" shall mean any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather is intended to include acceptable practices, methods, or acts generally accepted in the region. 1.16 INTERCONNECTION. "Interconnection" shall mean the coordinated operations and interchange resulting from the Original PJM Agreement as continued in this Agreement. 1.17 LLC. "LLC" shall mean PJM Interconnection, L.L.C., a Delaware limited liability company. 1.18 LOAD SERVING ENTITY. "Load Serving Entity" shall mean an entity, including a load aggregator or power marketer, (1) serving end-users within the PJM Control Area, and (2) that has been granted the authority or has an obligation pursuant to state or local law, regulation or franchise to sell electric energy to end-users located within the PJM Control Area, or the duly designated agent of such an entity. 1.19 LOCATIONAL MARGINAL PRICE. "Locational Marginal Price" shall mean the hourly integrated market clearing marginal price for energy at the location the energy is delivered or received, calculated as specified in Section 2 of Schedule 1 of this Agreement. 1.20 MAAC. "MAAC" shall mean the Mid-Atlantic Area Council, a reliability council under " 202 of the Federal Power Act established pursuant to the MAAC Agreement dated August 1, 1994, or any successor thereto. 4 1.21 MARKET BUYER. "Market Buyer" shall mean a Member that has met reasonable creditworthiness standards established by the Office of the Interconnection and that is otherwise able to make purchases in the PJM Interchange Energy Market or PJM Capacity Credit Market. 1.22 MARKET PARTICIPANT. "Market Participant" shall mean a Market Buyer or a Market Seller, or both. 1.23 MARKET SELLER. "Market Seller" shall mean a Member that has met reasonable creditworthiness standards established by the Office of the Interconnection and that is otherwise able to make sales in the PJM Interchange Energy Market or PJM Capacity Credit Market. 1.24 MEMBER. "Member" shall mean an entity that satisfies the requirements of Section 11.6 of this Agreement and that (i) is a member of the LLC immediately prior to the Effective Date, or (ii) has executed an Additional Member Agreement in the form set forth in Schedule 4 hereof. 1.25 MEMBERS COMMITTEE. "Members Committee" shall mean the committee specified in Section 8 of this Agreement composed of representatives of all the Members. 1.26 NERC. "NERC" shall mean the North American Electric Reliability Council, or any successor thereto. 1.27 OFFICE OF THE INTERCONNECTION. "Office of the Interconnection" shall mean the employees and agents of the LLC engaged in implementation of this Agreement and administration of the PJM Tariff, subject to the supervision and oversight of the PJM Board acting pursuant to this Agreement. 1.28 OPERATING RESERVE. "Operating Reserve" shall mean the amount of generating capacity scheduled to be available for a specified period of an Operating Day to ensure the reliable operation of the PJM Control Area, as specified in the PJM Manuals. 1.29 ORIGINAL PJM AGREEMENT. "Original PJM Agreement" shall mean that certain agreement between certain of the Members, originally dated September 26, 1956, and as amended and supplemented up to and including December 31, 1996, relating to the coordinated operation of their electric supply systems and the interchange of electric capacity and energy among their systems. 5 1.30 OTHER SUPPLIER. "Other Supplier" shall mean a Member that is (i) a seller, buyer or transmitter of electric capacity or energy in, from or through the PJM Control Area, and (ii) is not a Generation Owner, Electric Distributor, Transmission Owner or End-Use Customer. 1.31 PJM BOARD. "PJM Board" shall mean the Board of Managers of the LLC, acting pursuant to this Agreement. 1.32 PJM CONTROL AREA. "PJM Control Area" shall mean the Control Area recognized by NERC as the PJM Control Area. 1.33 PJM DISPUTE RESOLUTION PROCEDURES "PJM Dispute Resolution Procedures" shall mean the procedures for the resolution of disputes set forth in Schedule 5 of this Agreement. 1.34 PJM INTERCHANGE ENERGY MARKET. "PJM Interchange Energy Market" shall mean the regional competitive market administered by the Office of the Interconnection for the purchase and sale of spot electric energy at wholesale in interstate commerce and related services established pursuant to Schedule 1 to this Agreement. 1.35 PJM MANUALS. "PJM Manuals" shall mean the instructions, rules, procedures and guidelines established by the Office of the Interconnection for the operation, planning, and accounting requirements of the PJM Control Area and the PJM Interchange Energy Market. 1.36 PJM TARIFF. "PJM Tariff" shall mean the PJM Open Access Transmission Tariff providing transmission service within the PJM Control Area, including any schedules, appendices, or exhibits attached thereto, as in effect from time to time. 1.37 PLANNING PERIOD. "Planning Period" shall initially mean the 12 months beginning June 1 and extending through May 31 of the following year, or such other period established by the Reliability Committee established under the Reliability Assurance Agreement. 1.38 PRESIDENT. "President" shall have the meaning specified in Section 9.2. 6 1.39 RELATED PARTIES. "Related Parties" shall mean, solely for purposes of the governance provisions of this Agreement: (i) any generation and transmission cooperative and one of its distribution cooperative members; and (ii) any joint municipal agency and one of its members. For purposes of this Agreement, representatives of state or federal government agencies shall not be deemed Related Parties with respect to each other, and a public body's regulatory authority, if any, over a Member shall not be deemed to make it a Related Party with respect to that Member. 1.40 RELIABILITY ASSURANCE AGREEMENT. "Reliability Assurance Agreement" shall mean that certain agreement, dated June 2, 1997 and as amended from time to time, establishing obligations, standards and procedures for maintaining the reliable operation of the PJM Control Area. 1.41 SECTOR VOTES. "Sector Votes" shall mean the affirmative and negative votes of each sector on the Members Committee, as specified in Section 8.4. 1.42 STATE. "State" shall mean the District of Columbia and any State or Commonwealth of the United States. 1.43 SYSTEM. "System" shall mean the interconnected electric supply system of a Member and its interconnected subsidiaries exclusive of facilities which it may own or control outside of the PJM Control Area. Each Member may include in its system the electric supply systems of any party or parties other than Members which are within the PJM Control Area, provided its interconnection agreements with such other party or parties do not conflict with such inclusion. 1.44 TRANSMISSION FACILITIES. "Transmission Facilities" shall mean facilities that: (i) are within the PJM Control Area; (ii) meet the definition of transmission facilities pursuant to FERC"s Uniform System of Accounts or have been classified as transmission facilities in a ruling by FERC addressing such facilities; and (iii) have been demonstrated to the satisfaction of the Office of the Interconnection to be integrated with the PJM Control Area transmission system and integrated into the planning and operation of the PJM Control Area to serve all of the power and transmission customers within the PJM Control Area. 1.45 TRANSMISSION OWNER. "Transmission Owner" shall mean a Member that owns or leases with rights equivalent to ownership Transmission Facilities. Taking transmission service shall not be sufficient to qualify a Member as a Transmission Owner. 7 1.46 TRANSMISSION OWNERS AGREEMENT. "Transmission Owners Agreement" shall mean that certain agreement, dated June 2, 1997 and as amended from time to time, by and among Transmission Owners in the PJM Control Area providing for an open-access transmission tariff in the PJM Control Area, and for other purposes. 1.47 USER GROUP. "User Group" shall mean a group formed pursuant to Section 8.7 of this Agreement. 1.48 VOTING MEMBER "Voting Member" shall mean (i) a Member as to which no other Member is an Affiliate or Related Party, or (ii) a Member together with any other Members as to which it is an Affiliate or Related Party. 1.49 WEIGHTED INTEREST. "Weighted Interest" shall be equal to (0.1(1/N) + 0.5(B/C) + 0.2(D/E) + 0.2(F/G)), where: N = the total number of Members B = the Member's internal peak demand for the previous calendar year C = the sum of factor B for all Members D = the Member's net installed generating capacity located in the PJM Control Area as of January 1 of the current calendar year E = the sum of factor D for all Members F = the sum of the Member's circuit miles of transmission facilities multiplied by the respective operating voltage for facilities 100 kV and above as of January 1 of the current calendar year G = the sum of factor F for all Members 2. FORMATION, NAME; PLACE OF BUSINESS 2.1 FORMATION OF LLC; CERTIFICATE OF FORMATION. The Members of the LLC hereby: (a) acknowledge the conversion of the PJM Interconnection Association into the LLC, a limited liability company pursuant to the Act, by virtue of the filing of both the Certificate of Formation and the Certificate of Conversion with the Recording Office, effective as of March 31, 1997; (b) confirm and agree to their status as Members of the LLC; (c) enter into this Agreement for the purpose of amending and restating the rights, duties, and relationship of the Members; and (d) agree that if the laws of any jurisdiction in which the LLC transacts business so require, the PJM Board also shall file, with the appropriate office in that jurisdiction, any documents necessary for the LLC to qualify to transact business under such laws; and (ii) agree 8 and obligate themselves to execute, acknowledge, and cause to be filed for record, in the place or places and manner prescribed by law, any amendments to the Certificate of Formation as may be required, either by the Act, by the laws of any jurisdiction in which the LLC transacts business, or by this Agreement, to reflect changes in the information contained therein or otherwise to comply with the requirements of law for the continuation, preservation, and operation of the LLC as a limited liability company under the Act. 2.2 NAME OF LLC. The name under which the LLC shall conduct its business is "PJM Interconnection, L.L.C." 2.3 PLACE OF BUSINESS. The location of the principal place of business of the LLC shall be 955 Jefferson Avenue, Valley Forge Corporate Center, Norristown, Pennsylvania 19403- 2497. The LLC may also have offices at such other places both within and without the State of Delaware as the PJM Board may from time to time determine or the business of the LLC may require. 2.4 REGISTERED OFFICE AND REGISTERED AGENT. The street address of the initial registered office of the LLC shall be 1209 Orange Street, Wilmington, Delaware 19801, and the LLC's registered agent at such address shall be The Corporation Trust Company. The registered office and registered agent may be changed by resolution of the PJM Board. 3. PURPOSES AND POWERS OF LLC 3.1 PURPOSES. The purposes of the LLC shall be: (a) to operate in accordance with FERC requirements as an Independent System Operator, comprised of the PJM Board, the Office of the Interconnection, and the Members Committee, with the authorities and responsibilities set forth in this Agreement; (b) as necessary for the operation of the Interconnection as specified above: (i) to acquire and obtain licenses, permits and approvals, (ii) to own or lease property, equipment and facilities, and (iii) to contract with third parties to obtain goods and services, provided that, the L.L.C. may procure goods and services from a Member only after open and competitive bidding; and (c) to engage in any lawful business permitted by the Act or the laws of any jurisdiction in which the LLC may do business and to enter into any lawful transaction and engage in any lawful activities in furtherance of the foregoing purposes and as may be necessary, incidental or convenient to carry out the business of the LLC as contemplated by this Agreement. 9 3.2 POWERS. The LLC shall have the power to do any and all acts and things necessary, appropriate, advisable, or convenient for the furtherance and accomplishment of the purposes of the LLC, including, without limitation, to engage in any kind of activity and to enter into and perform obligations of any kind necessary to or in connection with, or incidental to, the accomplishment of the purposes of the LLC, so long as said activities and obligations may be lawfully engaged in or performed by a limited liability company under the Act. 4. EFFECTIVE DATE AND TERMINATION 4.1 EFFECTIVE DATE AND TERMINATION. (a) The existence of the LLC commenced on March 31, 1997, as provided in the Certificate of Formation and Certificate of Conversion which were filed with the Recording Office on March 31, 1997. This Agreement shall amend and restate the Operating Agreement of PJM Interconnection, L.L.C. as of the Effective Date. (b) The LLC shall continue in existence until terminated in accordance with the terms of this Agreement. The withdrawal or termination of any Member is subject to the provisions of Section 18.18 of this Agreement. (c) Any termination of this Agreement or withdrawal of any Member from the Agreement shall be filed with the FERC and shall become effective only upon the FERC's approval. GOVERNING LAW. This Agreement and all questions with respect to the rights and obligations of the Members, the construction, enforcement and interpretation hereof, and the formation, administration and termination of the LLC shall be governed by the provisions of the Act and other applicable laws of the State of Delaware, and the Federal Power Act. 10 5. WORKING CAPITAL AND CAPITAL CONTRIBUTIONS 5.1 FUNDING OF WORKING CAPITAL AND CAPITAL CONTRIBUTIONS. (a) The Office of the Interconnection shall attempt to obtain financing of up to twenty-five percent (25%) of the approved annual operating budget of the LLC adopted by the PJM Board pursuant to " 7.5.2 of this Agreement to meet the working capital needs of the LLC, which shall be limited to such working capital needs that arise from timing in cash flows from interchange accounting, tariff administration and payment of the operating costs of the Office of the Interconnection. Such financing, which shall be non-recourse to the Members of the LLC and which shall be for a stated term without penalty for prepayment, may be obtained by borrowing the amount required at market-based interest rates, negotiated on an arm's length basis, (i) from a Member or Members or (ii) from a commercial lender, supported, if necessary, by credit enhancements provided by a Member or Members; provided, however, no Member shall be obligated to provide such financing or credit enhancements. The LLC shall make such filings and seek such approvals as necessary in order for the principal, interest and fees related to any such borrowing to be repaid through charges under the PJM Tariff as appropriate under Schedule 3 of this Agreement. (b) In the event financing of the working capital needs of the Office of the Interconnection is unavailable on commercially reasonable terms, the PJM Board may require the Members to contribute capital in the aggregate up to five million two hundred thousand dollars ($5,200,000) for the working capital needs that could not be financed; provided that in such event each Member's obligation to contribute additional capital shall be in proportion to its Weighted Interest, multiplied by the amount so requested by the PJM Board. Each Member that contributes such capital shall be entitled to earn a return on the contribution to the extent such contribution has not been repaid, which return shall be at a fair market rate as determined by the PJM Board but in no event less than the current interest rate established pursuant to 18 C.F.R. " 35.19a(a)(2)(iii); provided further, that any Member not wanting to contribute the requested capital contribution may withdraw from the LLC upon 90 days written notice as provided in Section 18.18.2 of this Agreement. 5.2 CONTRIBUTIONS TO ASSOCIATION. All contributions prior to the Effective Date of the original Operating Agreement of PJM Interconnection, L.L.C. of cash or other assets to the PJM Interconnection Association by persons who are now or in the future may become Members of the LLC shall be deemed contributions by such Members to the LLC. 6. TAX STATUS AND DISTRIBUTIONS 6.1 TAX STATUS. The LLC shall make all necessary filings under the applicable Treasury Regulations to have the LLC taxed as a corporation. Revised: November 19, 1998 Effective: January 19, 1999 11 6.2 RETURN OF CAPITAL CONTRIBUTIONS. (a) In the event Members are required to contribute capital to the LLC in accordance with Section 5.1 herein, the LLC shall request the Transmission Owners to recover such working capital through charges under the PJM Tariff as provided in Schedule 3 of this Agreement. In the event all or a portion of the working capital is recovered pursuant to the PJM Tariff, such amount(s) shall be returned to the Members in accordance with their actual contributions. (b) Except for return of capital contributions and liquidating distributions as provided in the foregoing section and Section 6.3 herein, respectively, the LLC does not intend to make any distributions of cash or other assets to its Members. 6.3 LIQUIDATING DISTRIBUTION. Upon termination or liquidation of the LLC, the cash or other assets of the LLC shall be distributed as follows: (a) first, in the event the LLC has any liabilities at the time of its termination or dissolution, the LLC shall liquidate such of its assets as is necessary to satisfy such liabilities; (b) second, any capital contribution in cash or in kind by any Member of the PJM Interconnection Association prior to the Effective Date shall be distributed by the LLC back to such Member in the form received by the PJM Interconnection Association; and (c) third, any remaining assets of the LLC shall be distributed to the Members in proportion to their Weighted Interests. 7. PJM BOARD 7.1 COMPOSITION. There shall be an LLC Board of Managers, referred to herein as the "PJM Board," composed of seven voting members, with the President as a non-voting member. The seven voting Board Members shall be elected by the Members Committee from a slate of candidates for the then-existing vacancies or expiring terms on the PJM Board. An independent consultant, retained by the Office of the Interconnection upon consideration of the advice and recommendations of the Members Committee, shall be directed to prepare a list of persons qualified and willing to serve on the PJM Board. Not later than 30 days prior to each Annual Meeting of the Members, the Office of the Interconnection shall distribute to the representatives on the Members Committee a slate from among the list proposed by the independent consultant, along with information on the background and experience of the persons on the slate appropriate to evaluating their fitness for service on the PJM Board. Elections for the PJM Board shall be held at each Annual Meeting of the Members, for the purpose of selecting the initial PJM Board in accordance with the provisions of Section 7.3(a), or selecting a person to fill the seat of a Board Member whose term is expiring. Should the Members Committee fail to elect a full PJM Board from the slate proposed by the independent consultant, the Office of the Interconnection shall direct the independent consultant, or a replacement consultant selected by the Office of the Interconnection, to propose a list for a slate of nominees for any vacancies on the PJM Board for consideration by the Members at the next regular meeting of the Members Committee. 12 7.2 QUALIFICATIONS. A Board Member shall not be, and shall not have been at any time within five years of election to the PJM Board, a director, officer or employee of a Member or of an Affiliate or Related Party of a Member. Except as provided in the LLC's Standards of Conduct filed with the FERC, at any time while serving on the PJM Board, a Board Member shall have no direct business relationship or other affiliation with any Member or its Affiliates or Related Parties. Of the seven Board Members, four shall have expertise and experience in the areas of corporate leadership at the senior management or board of directors level, or in the professional disciplines of finance or accounting, engineering, or utility laws and regulation. Of the other three Board Members, one shall have expertise and experience in the operation or concerns of transmission dependent utilities, one shall have expertise and experience in the operation or planning of transmission systems, and one shall have expertise and experience in the area of commercial markets and trading and associated risk management. 7.3 TERM OF OFFICE. (a) The persons serving as the Board of Managers of the LLC immediately prior to the Effective Date shall continue in office until the first Annual Meeting of the Members. At the first Annual Meeting of the Members, the then current members of the PJM Board who desire to continue in office shall be elected by the Members to serve until the second Annual Meeting of the Members or until their successors are elected, along with such additional persons as necessary to meet the composition requirements of Section 7.1 and the qualification requirements of Section 7.2. (b) A Board Member shall serve for a term of three years commencing with the Annual Meeting of the Members at which the Board Member was elected; provided, however, that two of the Board Members elected at the first Annual Meeting of the Members following the Effective Date shall be chosen by lot to serve a term of one year, three of such Board Members shall be chosen by lot to serve a term of two years and the final two such Board Members shall serve a term of three years. (c) Vacancies on the PJM Board occurring between Annual Meetings of the Members shall be filled by vote of the then remaining Board Members; a Board Member so selected shall serve until the next Annual Meeting at which time a person shall be elected to serve the balance of the term of the vacant Board Seat. Removal of a Board Member shall require the approval of the Members Committee. 7.4 QUORUM. The presence in person or by telephone or other authorized electronic means of a majority of the voting Board Members shall constitute a quorum at all meetings of the PJM Board for the transaction of business except as otherwise provided by statute. If a quorum shall not be present, the Board Members then present shall have the power to adjourn the meeting from time to time, until a quorum shall be present. Provided a quorum is present at a meeting, the PJM Board shall act by majority vote of the Board Members present. 13 7.5 OPERATING AND CAPITAL BUDGETS. 7.5.1 FINANCE COMMITTEE. Not later than February 1 of each year, the entities specified below shall select the members of a Finance Committee. The Finance Committee shall be composed of one representative of the parties to the Reliability Assurance Agreement chosen by the parties to that agreement, one representative of the parties to the Transmission Owners Agreement chosen by the parties to that agreement, two representatives of the Members Committee chosen by the Members Committee and that are not representatives of an entity that is a party to the Transmission Owners Agreement or an Affiliate or Related Party of such an entity, one representative of the Office of the Interconnection selected by the President, and two Board Members selected by the PJM Board. The Members Committee shall endeavor to elect members of the Finance Committee that are broadly representative of the diversity of interests among the Members. The Office of the Interconnection shall prepare annual budgets in accordance with processes and procedures established by the PJM Board, and shall timely submit its budgets to the Finance Committee for review. The Finance Committee shall submit its analysis of and recommendations on the budgets to the PJM Board, with copies to the Members Committee. The Finance Committee shall also review and comment upon any additional or amended budgets prepared by the Office of the Interconnection at the request of the PJM Board or the Members Committee. 7.5.2 ADOPTION OF BUDGETS. The PJM Board shall adopt, upon consideration of the advice and recommendations of the Finance Committee, operating and capital budgets for the LLC, and shall distribute to the Members for their information final annual budgets for the following fiscal year not later than 60 days prior to the beginning of each fiscal year of the LLC. 7.6 BY-LAWS. To the extent not inconsistent with any provision of this Agreement, the PJM Board shall adopt such by-laws establishing procedures for the implementation of this Agreement as it may deem appropriate, including but not limited to by-laws governing the scheduling, noticing and conduct of meetings of the PJM Board, selection of a Chair and Vice Chair of the PJM Board, action by the PJM Board without a meeting, and the organization and responsibilities of standing and special committees of the PJM Board. Such by-laws shall not modify or be inconsistent with any of the rights or obligations established by this Agreement. 7.7 DUTIES AND RESPONSIBILITIES OF THE PJM BOARD. In accordance with this Agreement, the PJM Board shall supervise and oversee all matters pertaining to the Interconnection and the LLC, and carry out such other duties as are herein specified, including but not limited to the following duties and responsibilities: i) As its primary responsibility, ensure that the President, the other officers of the LLC, and Office of the Interconnection perform the duties and responsibilities set forth in this Agreement, including but not limited to those set forth in Sections 9.2 through 9.4 and Section 10.4 in a manner 14 consistent with (A) the safe and reliable operation of the Interconnection, (B) the creation and operation of a robust, competitive, and non-discriminatory electric power market in the PJM Control Area, and (C) the principle that a Member or group of Members shall not have undue influence over the operation of the Interconnection; ii) Select the Officers of the LLC; iii) Adopt budgets for the LLC; iv) Approve the Regional Transmission Expansion Plan in accordance with the provisions of the Regional Transmission Expansion Planning Protocol set forth in Schedule 6 of this Agreement. v) On its own initiative or at the request of a User Group as specified herein, submit to the Members Committee such proposed amendments to this Agreement or any Schedule hereto, or a proposed new Schedule, as it may deem appropriate; vi) Petition FERC to modify any provision of this Agreement or any Schedule or practice hereunder that the PJM Board believes to be unjust, unreasonable, or unduly discriminatory under Section 206 of the Federal Power Act, subject to the right of any Member or the Members to intervene in any resulting proceedings; vii) Review for consistency with the creation and operation of a robust, competitive and non-discriminatory electric power market in the PJM Control Area any change to rate design or to non-rate terms and conditions proposed by Transmission Owners for filing under Section 205 of the Federal Power Act. viii) If and to the extent it shall deem appropriate, intervene in any proceeding at FERC initiated by the Members in accordance with Section 11.5(b), and participate in other state and federal regulatory proceedings relating to the interests of the LLC; ix) Review, in accordance with Section 15.1.3, determinations of the Office of the Interconnection with respect to events of default; x) Assess against the other Members in proportion to their Weighted Interest an amount equal to any payment to the Office of the Interconnection, including interest thereon, as to which a Member is in default; xi) Establish reasonable sanctions for failure of a Member to comply with its obligations under this Agreement; xii) Direct the Office of the Interconnection on behalf of the LLC to take appropriate legal or regulatory action against a Member (A) to recover any unpaid amounts due from the Member to the Office of the Interconnection under this Agreement and to make whole any Members subject to an assessment as a result of such unpaid amount, or (B) as may otherwise be 15 necessary to enforce the obligations of this Agreement; xiii) Resolve claims by a Member that the Reliability Committee established by the Reliability Assurance Agreement has exercised its responsibilities in a manner inconsistent with the creation and operation of a robust, competitive and non-discriminatory electric power market in the PJM Control Area, upon due consideration of the views of the Member and of the Reliability Committee, and of the need to preserve the reliability of electric service in the PJM Control Area. xiv) Solicit the views of Members on, and commission from time to time as it shall deem appropriate independent reviews of, (A) the performance of the PJM Interchange Energy Market, (B) compliance by Market Participants with the rules and requirements of the PJM Interchange Energy Market, and (C) the performance of the Office of the Interconnection under performance criteria proposed by the Members Committee and approved by the PJM Board; and xv) Terminate a Member as may be appropriate under the terms of this Agreement. 8. MEMBERS COMMITTEE 8.1 SECTORS. 8.1.1 DESIGNATION. Voting on the Members Committee shall be by sectors. The Members Committee shall be composed of five sectors, one for Generation Owners, one for Other Suppliers, one for Transmission Owners, one for Electric Distributors, and one for End-Use Customers, provided that there are at least five Members in each Sector. Except as specified in Section 8.1.2, each Voting Member shall have one vote. Each Voting Member shall, within thirty (30) days after the Effective Date or, if later, thirty (30) days after becoming a Member, and thereafter not later than 10 days prior to the Annual Meeting of the Members for each annual period beginning with the Annual Meeting of the Members, submit to the President a sealed notice of the sector in which it is qualified to vote or, if qualified to participate in more than one sector, its rank order preference of the sectors in which it wishes to vote, and shall be assigned to its highest-ranked sector that has the minimum number of Members specified above. If a Member is assigned to a sector other than its highest-ranked sector in accordance with the preceding sentence, its higher sector preference or preferences shall be honored as soon as a higher-ranked sector has five or more Members. A Voting Member may designate as its voting sector any sector for which it or its Affiliate or Related Party Members is qualified. The sector designations of the Voting Members shall be announced by the President at the Annual Meeting. 16 8.1.2 RELATED PARTIES. The Members in a group of Related Parties shall each be entitled to a vote, provided that all the Members in a group of Related Parties that chooses to exercise such rights shall be assigned to the Electric Distributor sector. 8.2 REPRESENTATIVES. 8.2.1 APPOINTMENT. Each Member may appoint a representative to serve on the Members Committee, with authority to act for that Member with respect to actions or decisions by the Members Committee. Each Member may appoint an alternate representative to act for that Member at meetings of the Members Committee in the absence of the representative. A Member participating in the PJM Interchange Energy Market through an agent may be represented on the Members Committee by that agent. A Member shall appoint its representative by giving written notice identifying its representative and alternate representative to the Office of the Interconnection. Members that are Affiliates or Related Parties may each appoint a representative and alternate representative to the Members Committee, but shall vote as specified in Section 8.1. 8.2.2 REGULATORY AUTHORITIES. FERC and any other federal agency with regulatory authority over a Member, each State electric utility regulatory commission with regulatory jurisdiction within the PJM Control Area, and each office of consumer advocate from each State all or any part of the territory of which is within the PJM Control Area, may nominate one representative to serve as an ex officio non- voting member of the Members Committee. 8.2.3 INITIAL REPRESENTATIVES. Initial representatives to the Members Committee shall be appointed no later than 30 days after the Effective Date; provided, however, that each representative to the Management Committee under the Operating Agreement of PJM Interconnection, L.L.C. as in effect immediately prior to the Effective Date shall automatically become a representative to the Members Committee on the Effective Date unless replaced as specified in Section 8.2.4. An entity becoming a Member shall appoint a representative to the Members Committee no later than 30 days after becoming a Member. 8.2.4 CHANGE OF OR SUBSTITUTION FOR A REPRESENTATIVE. Any Member may change its representative or alternate on the Members Committee at any time by providing written notice to the Office of the Interconnection identifying its replacement representative or alternate. Any representative to the Members Committee may, by written notice to the Chair, designate a substitute representative from that Member to act for him or her with respect to any matter specified in such notice. 17 8.3 MEETINGS. 8.3.1 REGULAR AND SPECIAL MEETINGS. The Members Committee shall hold regular meetings, no less frequently than once each calendar quarter at such time and at such place as shall be fixed by the Chair. The Members Committee shall hold an Annual Meeting of the Members each calendar year at such time and place as shall be specified by the Chair. At the Annual Meeting of the Members, Board Members as necessary, officers of the Members Committee, and representatives to the Finance Committee shall be elected. The Members Committee may hold special meetings for one or more designated purposes within the scope of the authority of the Members Committee when called by the Chair on the Chair's own initiative, or at the request of five or more representatives on the Members Committee. The notice of a regular or special meeting shall be distributed to the representatives as specified in Section 18.13 of this Agreement not later than seven days prior to the meeting, shall state the time and place of the meeting, and shall include an agenda sufficient to notify the representatives of the substance of matters to be considered at the meeting; provided, however, that meetings may be called on shorter notice at the discretion of the Chair as the Chair shall deem necessary to deal with an emergency or to meet a deadline for action. 8.3.2 ATTENDANCE. Regular and special meetings may be conducted in person or by telephone, or other electronic means as authorized by the Members Committee. The attendance in person or by telephone or other electronic means of a representative or a duly designated substitute shall be required in order to vote. 8.3.3 QUORUM. The attendance as specified in Section 8.3.2 of a majority of the Voting Members from each of at least three sectors that each have at least five Members shall constitute a quorum, however, a quorum shall only require one- third of the Voting Members, but not less than ten, from any sector that has more than 20 Voting Members. No action may be taken by the Members Committee at a meeting unless a quorum is present; provided, however, that if a quorum is not present, the Voting Members then present shall have the power to adjourn the meeting from time to time until a quorum shall be present. 8.4 MANNER OF ACTING. (a) All matters brought up for a vote or approval by the Members Committee shall be stated in the form of a motion, which must be seconded. Only one motion may be pending at one time. (b) Each Sector shall be entitled to cast one and zero one-hundredths (1.00) Sector Votes. Each Voting Member shall be entitled to cast one (1) non- divisible vote in its sector. In the case of a Voting Member comprised of Affiliates or Related Parties, any representative, alternate or substitute of any of the Affiliated or Related Parties may cast the vote of the Voting Member. The Sector Vote of each sector shall be split into an affirmative component based on votes for the pending motion, and a negative component based on votes against the pending motion, in direct proportion to the votes cast within the sector for and against the pending motion, rounded to two decimal places. (c) The sum of affirmative Sector Votes necessary to pass the pending motion shall be Revised: November 19, 1998 Effective:January 14, 1999 18 greater than (but not merely equal to) the product of .667 multiplied by the number of sectors that have at least five Members and that participated in the vote. (d) Voting Members not in attendance at the meeting as specified in Section 8.3.2 of this Agreement or abstaining shall not be counted as affirmative or negative votes . 8.5 CHAIR AND VICE CHAIR OF THE MEMBERS COMMITTEE. 8.5.1 SELECTION AND TERM. The representatives or their alternates or substitutes on the Members Committee shall elect from among the representatives a Chair and a Vice Chair. The offices of Chair and Vice Chair shall be held for a term of one year and until succession to the office occurs as specified herein. Except as specified below, at each Annual Meeting of the Members the Vice Chair shall succeed to the office of Chair, and a new Vice Chair shall be elected. If the office of Chair becomes vacant, or the Chair leaves the employment of the Member for whom the Chair is the representative, or the Chair is no longer the representative of such Member, the Vice Chair shall succeed to the office of Chair, and a new Vice Chair shall be elected at the next regular or special meeting of the Members Committee, both such officers to serve until the second Annual Meeting of the Members following such succession or election to a vacant office. If the office of Vice Chair becomes vacant, or the Vice Chair leaves the employment of the Member for whom the Vice Chair is the representative, or the Vice Chair is no longer the representative of such Member, a new Vice Chair shall be elected at the next regular or special meeting of the Members Committee. 8.5.2 DUTIES. The Chair shall call and preside at meetings of the Members Committee, and shall carry out such other responsibilities as the Members Committee shall assign. The Chair shall cause minutes of each meeting of the Members Committee to be taken and maintained, and shall cause notices of meetings of the Members Committee to be distributed. The Vice Chair shall preside at meetings of the Members Committee in the absence of the Chair, and shall otherwise act for the Chair at the Chair's request. 8.6 OTHER COMMITTEES. (a) The Members Committee may form, select the membership, and oversee the activities, of an Operating Committee, a Planning Committee, and an Energy Market Committee as standing committees, and such other committees, subcommittees, task forces, working groups or other bodies as it shall deem appropriate, to provide advice and recommendations to the Members Committee or to the Office of the Interconnection as directed by the Members Committee. (b) The Members Committee shall elect representatives to the Alternate Dispute Resolution Committee as specified in the PJM Dispute Resolution Procedures. 19 8.7 USER GROUPS. (a) Any five or more Members sharing a common interest may form a User Group, and may invite such other Members to join the User Group as the User Group shall deem appropriate. Notification of the formation of a User Group shall be provided to all members of the Members Committee. (b) The Members Committee shall create a User Group composed of representatives of bona fide public interest and environmental organizations that are interested in the activities of the LLC and are willing and able to participate in such a User Group. Meetings of User Groups shall be open to all Members and the Office of the Interconnection. Notices and agendas of meetings of a User Group shall be provided to all Members that ask to receive them. (d) Any recommendation or proposal for action adopted by affirmative vote of three-fourths or more of the members of a User Group shall be circulated by the Office of the Interconnection to the representatives on the Members Committee and shall be considered by the Members Committee at its next regular meeting occurring not earlier than 30 days after the circulation of such notice. (e) If the Members Committee does not adopt a recommendation or proposal submitted to it by a User Group, upon vote of nine-tenths or more of the members of the User Group the recommendation or proposal may be submitted to the PJM Board for its consideration in accordance with Section 7.7(v). 8.8 POWERS OF THE MEMBERS COMMITTEE. The Members Committee, acting by adoption of a motion as specified in Section 8.4, shall have the power to take the actions specified in this Agreement, including: i) Elect the members of the PJM Board; ii) In accordance with the provisions of Section 18.6 of this Agreement, amend any portion of this Agreement, including the Schedules hereto, or create new Schedules, and file any such amendments or new Schedules with FERC or other regulatory body of competent jurisdiction; iii) Terminate this Agreement; and iv) Provide advice and recommendations to the PJM Board and the Office of the Interconnection. 20 9. OFFICERS 9.1 ELECTION AND TERM. The officers of the LLC shall consist of a President, a Secretary and a Treasurer. The PJM Board may elect such other officers as it deems necessary to carry out the business of the LLC. All officers shall be elected by the PJM Board and shall hold office until the next annual meeting of the PJM Board and until their successors are elected. Any number of offices may be held by the same person, except that the offices of the President and Treasurer may not be held by the same person. 9.2 PRESIDENT. The PJM Board shall appoint a President and Chief Executive Officer of the LLC (the "President"). The President shall direct and supervise the day-to-day operation of the LLC, and shall report to the PJM Board. The President shall be responsible for directing and supervising the Office of the Interconnection in the performance of the duties and responsibilities specified in Section 10.4. The President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the LLC, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board to some other officer or agent of the LLC. In the absence of the President or in the event of his or her inability or refusal to act, and if a vice president has been appointed by the PJM Board, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the PJM Board in its Minutes) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice President shall perform such other duties and have such other powers as the PJM Board may from time to time prescribe. 9.3 SECRETARY. The Secretary shall attend all meetings of the PJM Board and record all the proceedings of the meetings of the PJM Board in a minute book to be kept for that purpose and shall perform like duties for the standing committees or special committees when required. He or she shall give, or cause to be given, notice of all special meetings of the PJM Board, and shall perform such other duties as may be prescribed by the PJM Board or President, under whose supervision he or she shall be. He or she shall have custody of the corporate seal of the LLC, and he or she, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and, when so affixed, it may be attested by his or her signature or by the signature of such assistant secretary. The PJM Board may give general authority to any other officer to affix the seal of the LLC and to attest the affixing by his or her signature. 21 9.4 TREASURER. The Treasurer shall have or arrange for the custody of the LLC's funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belongings to the LLC and shall deposit all moneys and other valuable effects in the name and to the credit of the LLC in such depositories as may be designated by the PJM Board. The Treasurer shall disburse the funds of the LLC as may be ordered by the PJM Board, taking proper vouchers for such disbursements, and shall render to the President and PJM Board at its regular meetings, or when the PJM Board so requires, an account of his or her transactions as Treasurer and of the financial condition of the LLC. If required by the Board, the Treasurer shall give the LLC a bond (which shall be renewed periodically) in such sum and with such surety or sureties as shall be satisfactory to the PJM Board for the faithful performance of the duties of his office and of the restoration to the LLC, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the LLC. 9.5 RENEWAL OF OFFICERS; VACANCIES. Any officer elected or appointed by the PJM Board may be removed at any time by the affirmative vote of a majority of the PJM Board eligible to vote. Any vacancy occurring in any office of the LLC shall be filled by the PJM Board. 9.6 COMPENSATION. The salaries of all officers and agents of the LLC, and the reasonable compensation of the PJM Board, shall be fixed by the PJM Board. 10. OFFICE OF THE INTERCONNECTION. 10.1 ESTABLISHMENT. The Office of the Interconnection shall implement this Agreement, administer the PJM Tariff, and undertake such other responsibilities as set forth herein. All personnel of the Office of the Interconnection shall be employees of the LLC or under contract thereto. The cost of the Office of the Interconnection and expenses associated therewith, including salaries and expenses of said personnel, space and any necessary facilities or other capital expenditures, shall be recovered in accordance with Schedule 3. The Office of the Interconnection shall adopt, publish and comply with standards of conduct that satisfy the regulations of FERC. 10.2 PROCESSES AND ORGANIZATION. In order to carry out the responsibilities of the Office of the Interconnection for the safe and reliable operation of the Interconnection, the President may establish processes and organization for operating personnel and facilities as the President shall deem appropriate, and shall request such Members as the President shall deem appropriate to participate in such processes and organization. All such processes and organization shall be carried out in accordance with all applicable code of conduct or other functional separation requirements of FERC. 22 10.3 CONFIDENTIAL INFORMATION. The Office of the Interconnection shall comply with the requirements of Section 18.17 with respect to any proprietary or confidential information received from or about any Member. 10.4 DUTIES AND RESPONSIBILITIES. The Office of the Interconnection, under the direction of the President as supervised and overseen by the PJM Board, shall carry out the following duties and responsibilities, in accordance with the provisions of this Agreement: i) Administer and implement this Agreement; ii) Perform such functions in furtherance of this Agreement as the PJM Board, acting within the scope of its duties and responsibilities under this Agreement, may direct; iii) Prepare, maintain, update and disseminate the PJM Manuals; iv) Comply with MAAC and NERC operation and planning standards, principles and guidelines; v) Maintain an appropriately trained workforce, and such equipment and facilities, including computer hardware and software and backup power supplies, as necessary or appropriate to implement or administer this Agreement; vi) Direct the operation and coordinate the maintenance of the facilities of the Interconnection used for both load and reactive supply, so as to maintain reliability of service and obtain the benefits of pooling and interchange consistent with this Agreement and the Reliability Assurance Agreement; vii) Direct the operation and coordinate the maintenance of the bulk power supply facilities of the Interconnection with such facilities and systems of others not party to this Agreement in accordance with agreements between the LLC and such other systems to secure reliability and continuity of service and other advantages of pooling on a regional basis; viii) Perform interchange accounting and maintain records pertaining to the operation of the PJM Interchange Energy Market and the Interconnection; ix) Notify the Members of the receipt of any application to become a Member, and of the action of the Office of the Interconnection on such application, including but not limited to the completion of integration of a new Member's system into the PJM Control Area as specified in Section 11.6(f); x) Calculate the Weighted Interest of each Member; xi) Maintain accurate records of the sectors in which each Voting Member is entitled to vote, and calculate the results of any vote taken in the Members Committee; 23 xii) Furnish appropriate information and reports as are required to keep the Members regularly informed of the outlook for, the functioning of, and results achieved by the Interconnection; xiii) File with FERC on behalf of the Members any amendments to this Agreement or the Schedules hereto, any new Schedules hereto, and make any other regulatory filings on behalf of the Members or the LLC necessary to implement this Agreement; xiv) At the direction of the PJM Board, submit comments to regulatory authorities on matters pertinent to the Interconnection; xv) Consult with the standing or other committees established pursuant to Section 8.6(a) on matters within the responsibility of the committee; xvi) Perform operating studies of the bulk power supply facilities of the Interconnection and make such recommendations and initiate such actions as may be necessary to maintain reliable operation of the Interconnection; xvii) Accept, on behalf of the Members, notices served under this Agreement; xviii) Perform those functions and undertake those responsibilities transferred to it under the Transmission Owners Agreement, including (A) direct the operation of the transmission facilities of the parties to the Transmission Owners Agreement, (B) administer the PJM Tariff, and (C) administer the Regional Transmission Expansion Planning Protocol set forth as Schedule 6 to this Agreement. xix) Perform those functions and undertake those responsibilities transferred to it under the Reliability Assurance Agreement, as specified in Schedule 8 of this Agreement. xx) Monitor the operation of the PJM Control Area, ensure that appropriate Emergency plans are in place and appropriate Emergency drills are conducted, declare the existence of an Emergency, and direct the operations of the Members as necessary to manage, alleviate or end an Emergency; xxi) Incorporate the grid reliability requirements applicable to nuclear generating units in the PJM Control Area planning and operating principles and practices; and xxii) Initiate such legal or regulatory proceedings as directed by the PJM Board to enforce the obligations of this Agreement. 24 11. MEMBERS 11.1 MANAGEMENT RIGHTS. The Members or any of them shall not take part in the management of the business of, and shall not transact any business for, the LLC in their capacity as Members, nor shall they have power to sign for or to bind the LLC. 11.2 OTHER ACTIVITIES. Except as otherwise expressly provided herein, any Member may engage in or possess any interest in another business or venture of any nature and description, independently or with others, even if such activities compete directly with the business of the LLC, and neither the LLC nor any Member hereof shall have any rights in or to any such independent ventures or the income or profits derived therefrom. 11.3 MEMBER RESPONSIBILITIES. 11.3.1 GENERAL. To facilitate and provide for the work of the Office of the Interconnection and of the several committees appointed by the Members Committee, each Member shall, to the extent applicable; (a) Maintain adequate records and, subject to the provisions of this Agreement for the protection of the confidentiality of proprietary or commercially sensitive information, provide data required for (i) coordination of operations, (ii) accounting for all interchange transactions, (iii) preparation of required reports, (iv) coordination of planning, including those data required for capacity accounting, (v) preparation of maintenance schedules, (vi) analysis of system disturbances, and (vii) such other purposes, including those set forth in Schedule 2, as will contribute to the reliable and economic operation of the Interconnection; (b) Provide such recording, telemetering, communication and control facilities as are required for the coordination of its operations with the Office of the Interconnection and those of the other Members and to enable the Office of the Interconnection to operate the PJM Control Area and otherwise implement and administer this Agreement, including equipment required in normal and Emergency operations and for the recording and analysis of system disturbances; (c) Provide adequate and properly trained personnel to (i) permit participation in the coordinated operation of the Interconnection, (ii) meet its obligation on a timely basis for supply of records and data, (iii) serve on committees and participate in their investigations, and (iv) share in the representation of the Interconnection in inter-regional and national reliability activities; (d) Share in the costs of committee activities and investigations (including costs of consultants, computer time and other appropriate items), communication facilities used by all the Members (in addition to those provided in the Office of the Interconnection), and such other expenses as are approved for payment by the PJM Board, such costs to be recovered as provided in Schedule 3; 25 (e) Comply with the requirements of the PJM Manuals and all directives of the Office of the Interconnection to take any action for the purpose of managing, alleviating or ending an Emergency, and authorize the Office of the Interconnection to direct the transfer or interruption of the delivery of energy on their behalf to meet an Emergency and to implement agreements with other Control Areas interconnected with the PJM Control Area for the mutual provision of service to meet an Emergency, and be subject to the emergency procedure charges specified in Schedule 9 of this Agreement for any failure to follow the Emergency instructions of the Office of the Interconnection. 11.3.2 FACILITIES PLANNING AND OPERATION. Consistent with and subject to the requirements of this Agreement, the PJM Tariff, the MAAC Agreement, the Reliability Assurance Agreement, the Transmission Owners Agreement, and the PJM Manuals, each Member shall cooperate with the other Members in the coordinated planning and operation of the facilities of its System within the PJM Control Area so as to obtain the greatest practicable degree of reliability, compatible economy and other advantages from such coordinated planning and operation. In furtherance of such cooperation each Member shall, as applicable: (a) Consult with the other Members and the Office of the Interconnection, and coordinate the installation of its electric generation and Transmission Facilities with those of such other Members so as to maintain reliable service in the PJM Control Area; (b) Coordinate with the other Members, the Office of the Interconnection and with others in the planning and operation of the regional facilities to secure a high level of reliability and continuity of service and other advantages; (c) Cooperate with the other Members and the Office of the Interconnection in the implementation of all policies and procedures established pursuant to this Agreement for dealing with Emergencies, including but not limited to policies and procedures for maintaining or arranging for a portion of a Member's Capacity Resources at least equal to the level established pursuant to the Reliability Assurance Agreement to have the ability to go from a shutdown condition to an operating condition and start delivering power without assistance from the power system; (d) Cooperate with the members of MAAC to augment the reliability of the bulk power supply facilities of the region and comply with MAAC and NERC operating and planning standards, principles and guidelines and the PJM Manuals; (e) Obtain or arrange for transmission service as appropriate to carry out this Agreement; (f) Cooperate with the Office of the Interconnection's coordination of the operating and maintenance schedules of the Member's generating and Transmission Facilities with the facilities of other Members to maintain reliable service to its own customers and those of the other Members and to obtain economic efficiencies consistent therewith; (g) Cooperate with the other Members and the Office of the Interconnection in the analysis, formulation and implementation of plans to prevent or eliminate conditions that 26 impair the reliability of the Interconnection; and (h) Adopt and apply standards adopted pursuant to this Agreement and conforming to MAAC and NERC standards, principles and guidelines and the PJM Manuals, for system design, equipment ratings, operating practices and maintenance practices. 11.3.3 ELECTRIC DISTRIBUTORS. In addition to any of the foregoing responsibilities that may be applicable, each Member that is an Electric Distributor, whether or not that Member votes in the Members Committee in the Electric Distributor sector or meets the eligibility requirements for any other sector of the Members Committee, shall: (a) Accept, comply with or be compatible with all standards applicable within the PJM Control Area with respect to system design, equipment ratings, operating practices and maintenance practices as set forth in the PJM Manuals, or be subject to an interconnected Member's requirements relating to the foregoing, so that sufficient electrical equipment, control capability, information and communication are available to the Office of the Interconnection for planning and operation of the PJM Control Area; (b) Assure the continued compatibility of its local system energy management system monitoring and telecommunications systems to satisfy the technical requirements of interacting automatically or manually with the Office of the Interconnection as it directs the operation of the PJM Control Area; (c) Maintain or arrange for a portion of its connected load to be subject to control by automatic underfrequency, under-voltage, or other load- shedding devices at least equal to the levels established pursuant to the Reliability Assurance Agreement, or be subject to another Member's control for these purposes; (d) Provide or arrange for sufficient reactive capability and voltage control facilities to conform to Good Utility Practice and (i) to meet the reactive requirements of its system and customers and (ii) to maintain adequate voltage levels and the stability required by the bulk power supply facilities of the Interconnection; (e) Shed connected load, share Capacity Resources, initiate active load management programs, and take such other coordination actions as may be necessary in accordance with the directions of the Office of the Interconnection in Emergencies; (f) Maintain or arrange for a portion of its Capacity Resources at least equal to the level established pursuant to the Reliability Assurance Agreement to have the ability to go from a shutdown condition to an operating condition and start delivering power without assistance from the power system; (g) Provide or arrange through another Member for the services of a 24- hour local control center to coordinate with the Office of the Interconnection, each such control center to be furnished with appropriate telemetry equipment as specified in the PJM Manuals, and to be staffed by system operators trained and delegated sufficient authority to take any action necessary to assure that the system for which the operator is responsible is operated in a stable and reliable manner; 27 (h) Provide to the Office of the Interconnection all System, accounting, customer tracking, load forecasting and other data necessary or appropriate to implement or administer this Agreement or the Reliability Assurance Agreement; and (i) Comply with the underfrequency relay obligations and charges specified in Schedule 7 of this Agreement. 11.3.4 REPORTS TO THE OFFICE OF THE INTERCONNECTION. Each Member shall report as promptly as possible to the Office of the Interconnection any changes in its operating practices and procedures relating to the reliability of the bulk power supply facilities of the Interconnection. The Office of the Interconnection shall review such reports, and if any change in an operating practice or procedure of the Member is not in accord with the established operating principles, practices and procedures for the Interconnection and such change adversely affects the Interconnection and regional reliability, it shall so inform such Member, and the other Members through their representative on the Operating Committee, and shall direct that such change be modified to conform to the established operating principles, practices and procedures. 11.4 REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL. The Members shall participate in regional transmission expansion planning in accordance with the Regional Transmission Expansion Planning Protocol set forth in Schedule 6 to this Agreement. 11.5 MEMBER RIGHT TO PETITION. (a) Nothing herein shall deprive any Member of the right to petition FERC to modify any provision of this Agreement or any Schedule or practice hereunder that the petitioning Member believes to be unjust, unreasonable, or unduly discriminatory under Section 206 of the Federal Power Act, subject to the right of any other Member (a) to oppose said proposal, or (b) to withdraw from the LLC pursuant to Section 4.1. (b) Nothing herein shall be construed as affecting in any way the right of the Members, acting pursuant to a vote of the Members Committee as specified in Section 8.4, unilaterally to make an application to FERC for a change in any rate, charge, classification, tariff or service, or any rule or regulation related thereto, under section 205 of the Federal Power Act and pursuant to the rules and regulations promulgated by FERC thereunder, subject to the right of any Member that voted against such change in any rate, charge, classification, tariff or service, or any rule or regulation related thereto, in intervene in opposition to any such application. (c) Nothing in this Agreement shall preclude those Members joining in the proposal to utilize Locational Marginal Prices to deal with transmission congestion from (i) filing amendments to the Agreement necessary to implement the use of Locational Marginal Prices in the PJM Control Area in accordance with such orders or other directives as may be issued by FERC relating thereto, or (ii) implementing the provisions of Sections 1.7.21 and 5.2.2(d) of Schedule 1 to this Agreement, without further authorization or approval by the Members Committee. 28 11.6 MEMBERSHIP REQUIREMENTS. (a) To qualify as a Member, an entity shall: i) Be a Transmission Owner within the PJM Control Area or an Eligible Customer under the PJM Tariff; ii) If not a Transmission Owner, be a Generation Owner, an Other Supplier, an Electric Distributor, or an End-Use Consumer; iii) Be engaged in buying, selling or transmitting electric energy in or through the Interconnection or have a good faith intent to do so; and iv) Accept the obligations set forth in this Agreement. (b) Certain Members that are Load Serving Entities are parties to the Reliability Assurance Agreement. Upon becoming a Member, any entity that is a Load Serving Entity and that wishes to become a Market Buyer shall also simultaneously execute the Reliability Assurance Agreement. (c) An entity that wishes to become a party to this Agreement shall apply, in writing, to the President setting forth its request, its qualifications for membership, its agreement to supply data as specified in this Agreement, its agreement to pay all costs and expenses in accordance with Schedule 3, and providing all information specified pursuant to the Schedules to this Agreement for entities that wish to become Market Participants. Any such application that meets all applicable requirements shall be approved by the President within sixty (60) days. (d) Nothing in this Section 11 is intended to remove, in any respect, the choice of participation by other utility companies or organizations in the operation of the Interconnection through inclusion in the System of a Member. (e) An entity whose application is accepted by the President pursuant to Section 11.6(c) shall execute a supplement to this Agreement in substantially the form prescribed in Schedule 4, which supplement shall be countersigned by the President and tendered for filing with FERC by the President. The entity shall become a Member effective on the date specified by FERC when accepting the supplement for filing. (f) Entities whose applications contemplate expansion or rearrangement of the PJM Control Area may become Members promptly as described in Sections 11.6(c) and 11.6(e) above, but the integration of the applicant's system into all of the operation and accounting provisions of this Agreement and the Reliability Assurance Agreement shall occur only after completion of all required installations and modifications of metering, communications, computer programming, and other necessary and appropriate facilities and procedures, as determined by the Office of the Interconnection. The Office of the Interconnection shall notify the other Members when such integration has occurred. 29 12. TRANSFERS OF MEMBERSHIP INTEREST The rights and obligations created by this Agreement shall inure to and bind the successors and assigns of such Member; provided, however, that the rights and obligations of any Member hereunder shall not be assigned without the approval of the Members Committee except as to a successor in operation of a Member's electric operating properties by reason of a merger, consolidation, reorganization, sale, spinoff, or foreclosure, as a result of which substantially all such electric operating properties are acquired by such a successor, and such successor becomes a Member. 13. INTERCHANGE 13.1 INTERCHANGE ARRANGEMENTS WITH NON-MEMBERS. Any Member may enter into interchange arrangements with others who are not Members with respect to the delivery or receipt of capacity and energy to fulfill its obligations hereunder or for any other purpose, subject to the standards and requirements established in or pursuant to this Agreement. 13.2 ENERGY MARKET. The Office of the Interconnection shall administer an efficient energy market within the Interconnection, to be known as the PJM Interchange Energy Market, in which Members may buy and sell energy. The Office of the Interconnection will schedule in advance and dispatch generation on the basis of least-cost, security-constrained dispatch and the prices and operating characteristics offered by sellers within and into the Interconnection, continuing until sufficient generation is dispatched to serve the energy purchase requirements of the Interconnection and buyers out of the Interconnection, as well as the requirements of the Interconnection for ancillary services provided by such generation. Scheduling and dispatch shall be conducted in accordance with applicable schedules to the PJM Tariff and the Schedules to this Agreement. 14. METERING 14.1 INSTALLATION, MAINTENANCE AND READING OF METERS. The quantities of electric energy involved in determination of the amounts of the billing rendered hereunder shall be ascertained by means of meters installed, maintained and read either at the expense of the party on whose premises the meters are located or as otherwise provided for by agreement between the parties concerned. 14.2 METERING PROCEDURES. Procedures with respect to maintenance, testing, calibrating, correction and registration records, and precision tolerance of all metering equipment shall be in accordance with Good Utility Practice. The expense of testing any meter shall be borne by the party owning such meter, except that when a meter tested upon request of another party is found to register within the established tolerance the party making the request shall bear the expense of such test. 30 14.3 INTEGRATED MEGAWATT-HOURS All metering of energy required herein shall be the integration of megawatt hours in the clock hour, and the quantities thus obtained shall constitute the megawatt load for such clock hour; provided, however, that adjustment shall be made for other contractual obligations of any Member as may be required to determine the quantity to be accounted for hereunder, and for transmission losses. 14.4 METER LOCATIONS. The meter locations to be used by the Members in determining their energy transactions on the Interconnection shall be as reasonably determined from time to time by the Member or the Office of the Interconnection. 15. ENFORCEMENT OF OBLIGATIONS 15.1 FAILURE TO MEET OBLIGATIONS. 15.1.1 TERMINATION OF MARKET BUYER RIGHTS. The Office of the Interconnection shall terminate a Market Buyer's right to make purchases from the PJM Interchange Energy Market if it determines that the Market Buyer does not continue to meet the obligations set forth in this Agreement, provided that the Office of the Interconnection has notified the Market Buyer of any such deficiency and afforded the Market Buyer a reasonable opportunity to cure it. The Office of the Interconnection shall reinstate a Market Buyer's right to make purchases from the PJM Interchange Energy Market upon demonstration by the Market Buyer that it has come into compliance with the obligations set forth in this Agreement. 15.1.2 TERMINATION OF MARKET SELLER RIGHTS. The Office of the Interconnection shall not accept offers from a Market Seller that has not complied with the prices, terms, or operating characteristics of any of its prior scheduled transactions in the PJM Interchange Energy Market, unless such Market Seller has taken appropriate measures to the satisfaction of the Office of the Interconnection to ensure future compliance. 31 15.1.3 PAYMENT OF BILLS. (a) A Member shall make full and timely payment, in accordance with the terms specified by the Office of the Interconnection, of all bills rendered in connection with transactions in the PJM Interchange Energy Market or other services performed by the Office of the Interconnection, notwithstanding any disputed amount, but any such payment shall not be deemed a waiver of any right with respect to such dispute. Any Member that fails to make such payment, or otherwise fails to meet its financial or other obligations to a Member, the Office of the Interconnection or the LLC under this Agreement, shall upon expiration of the 30 day period specified below be in default. If the Office of the Interconnection concludes, upon its own initiative or the recommendation of or complaint by the Members Committee or any Member, that a Member is in breach of any obligation under this Agreement, the Office of the Interconnection shall so notify such Member and inform all other Members. The notified Member may remedy such asserted breach by: (i) paying all amounts assertedly due, along with interest on such amounts calculated in accordance with the methodology specified for interest on refunds in FERC's regulations at 18 C.F.R. " 35.19a(a)(2)(iii); and (ii) demonstration to the satisfaction of the Office of the Interconnection that the Member has taken appropriate measures to meet any other obligation of which it was deemed to be in breach; provided, however, that any such payment or demonstration may be subject to a reservation of rights, if any, to subject such matter to the PJM Dispute Resolution Procedures; and provided, further, that any such determination by the Office of the Interconnection may be subject to review by the PJM Board upon request of the Member involved or the Office of the Interconnection. If a Member has not remedied a breach by the 30th day following receipt of the Office of the Interconnection's notice, or receipt of the PJM Board's decision on review, if applicable, then the Member shall be in default and, in addition to such other remedies as may be available to the LLC: i) A defaulting Market Participant shall be precluded from buying or selling energy in the PJM Interchange Energy Market until the default is remedied as set forth above. ii) A defaulting Member shall not be entitled to participate in the activities of any committee or other body established by the Members Committee or the Office of the Interconnection. iii) A defaulting Member shall not be entitled to vote on the Members Committee or any other committee or other body established pursuant to this Agreement. 32 15.2 ENFORCEMENT OF OBLIGATIONS. If the Office of the Interconnection sends a notice to the PJM Board that a Member has failed to perform an obligation under this Agreement, the PJM Board shall initiate such action against such Member to enforce such obligation as the PJM Board shall deem appropriate. Subject to the procedures specified in Section 15.1, a Member's failure to perform such obligation shall be deemed to be a default under this Agreement. In order to remedy a default, but without limiting any rights the LLC may have against the defaulting Member, the PJM Board may assess against, and collect from, the Members not in default, in proportion to their Weighted Interest, an amount equal to the amount that the defaulting Member has failed to pay to the Office of the Interconnection, along with appropriate interest, but such assessment shall in no way relieve the defaulting Member of its obligations, and shall confer upon the Members Committee the right to recover the assessed amounts from the defaulting Member. In addition to any amounts in default, the defaulting Member shall be liable to the LCC for reasonable costs incurred in enforcing the defaulting Member's obligations. 15.3 OBLIGATIONS TO A MEMBER IN DEFAULT. The Members have no continuing obligation to provide the benefits of interconnected operations to a Member in default. 15.4 OBLIGATIONS OF A MEMBER IN DEFAULT. A Member found to be in default shall take all possible measures to mitigate the continued impact of the default on the Members not in default, including, but not limited to, loading its own generation to supply its own load to the maximum extent possible. 15.5 NO IMPLIED WAIVER. A failure of a Member, the PJM Board, or the LLC to insist upon or enforce strict performance of any of the provisions of this Agreement shall not be construed as a waiver or relinquishment to any extent of such entity's right to assert or rely upon any such provisions, rights and remedies in that or any other instance; rather, the same shall be and remain in full force and effect. 33 16. LIABILITY AND INDEMNITY 16.1 MEMBERS. (a) As between the Members, except as may be otherwise agreed upon between individual Members with respect to specified interconnections, each Member will indemnify and hold harmless each of the other Members, and its directors, officers, employees, agents, or representatives, of and from any and all damages, losses, claims, demands, suits, recoveries, costs and expenses (including all court costs and reasonable attorneys' fees), caused by reason of bodily injury, death or damage to property of any third party, resulting from or attributable to the fault, negligence or willful misconduct of such Member, its directors, officers, employees, agents, or representatives, or resulting from, arising out of, or in any way connected with the performance of its obligations under this Agreement, excepting only, and to the extent, such cost, expense, damage, liability or loss may be caused by the fault, negligence or willful misconduct of any other Member. The duty to indemnify under this Agreement will continue in full force and effect notwithstanding the expiration or termination of this Agreement or the withdrawal of a Member from this Agreement, with respect to any loss, liability, damage or other expense based on facts or conditions which occurred prior to such termination or withdrawal. (b) The amount of any indemnity payment arising hereunder shall be reduced (including, without limitation, retroactively) by any insurance proceeds or other amounts actually recovered by the Member seeking indemnification in respect of the indemnified action, claim, demand, costs, damage or liability. If any Member shall have received an indemnity payment for an action, claim, demand, cost, damage or liability and shall subsequently actually receive insurance proceeds or other amounts for such action, claim, demand, cost, damage or liability, then such Member shall pay to the Member that made such indemnity payment the lesser of the amount of such insurance proceeds or other amounts actually received and retained or the net amount of the indemnity payments actually received previously. 34 16.2 LLC INDEMNIFIED PARTIES. (a) The LLC will indemnify and hold harmless the PJM Board, the LLC's officers, employees and agents, and any representatives of the Members serving on the Members Committee and any other committee created under Section 8 of this Agreement (all such Board Members, officers, employees, agents and representatives for purposes of this Section 16 being referred to as "LLC Indemnified Parties"), of and from any and all actions, claims, demands, costs (including consequential or indirect damages, economic losses and all court costs and reasonable attorneys' fees) and liabilities to any third parties, arising from, or in any way connected with, the performance of the LLC under this Agreement, or the fact that such LLC Indemnified Party was serving in such capacity, except to the extent that such action, claim, demand, cost or liability results from the willful misconduct of any LLC Indemnified Party with respect to participation in the misconduct. To the extent any dispute arises between any Member and the LLC arising from, or in any way connected with, the performance of the LLC under this Agreement, the Member and the LLC shall follow the PJM Dispute Resolution Procedures. To the extent that any such action, claim, demand, cost or liability arises from a Member's contractual or other obligation to provide electric service directly or indirectly to said third party, which obligation to provide service is limited by the terms of any tariff, service agreement, franchise, statute, regulatory requirement, court decision or other limiting provision, the Member designates the LLC and each LLC Indemnified Party a beneficiary of said limitation. (b) An LLC Indemnified Party shall not be personally liable for monetary damages for any breach of fiduciary duty by such LLC Indemnified Party, except that an LLC Indemnified Party shall be liable to the extent provided by applicable law (i) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, or (ii) for any transaction from which the LLC Indemnified Party derived an improper personal benefit. Notwithstanding (i) and (ii), indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the LLC if and to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. If applicable law is hereafter construed or amended to authorize the further elimination or limitation of the liability of LLC Indemnified Parties, then the liability of the LLC Indemnified Parties, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by law. No amendment to or repeal of this section shall apply to or have any effect on the liability or alleged liability of any LLC Indemnified Party or with respect to any acts or omissions occurring prior to such amendment or repeal. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the LLC, and with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. (c) The LLC may pay expenses incurred by an LLC Indemnified Party in defending a civil, criminal, administrative or investigative action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of 35 such LLC Indemnified Party to repay such amount if it shall ultimately be determined that such LLC Indemnified Party is not entitled to be indemnified by the LLC as authorized in this Section . (d) In the event the LLC incurs liability under this Section 16.2 that is not adequately covered by insurance, such amounts shall be recovered pursuant to the PJM Tariff as provided in Schedule 3 of this Agreement. 16.3 WORKER' COMPENSATION CLAIMS. Each Member shall be solely responsible for all claims of its own employees, agents and servants growing out of any Worker's Compensation Law. 16.4 LIMITATION OF LIABILITY. No Member or its directors, officers, employees, agents, or representatives shall be liable to any other Member or its directors, officers, employees, agents, or representatives, whether liability arises out of contract, tort (including negligence), strict liability, or any other cause of or form of action whatsoever, for any indirect, incidental, consequential, special or punitive cost, expense, damage or loss, including but not limited to loss of profits or revenues, cost of capital of financing, loss of goodwill or cost of replacement power, arising from such Member's performance or failure to perform any of its obligations under this Agreement or the ownership, maintenance or operation of its System; provided, however, that nothing herein shall be deemed to reduce or limit the obligations of any Member with respect to the claims of persons or entities that are not parties to this Agreement. 16.5 RESOLUTION OF DISPUTES. To the extent any dispute arises between one or more Members regarding any issue covered by this Agreement, the Members shall follow the dispute resolution procedures set forth in the PJM Dispute Resolution Procedures. 16.6 GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Neither the LLC nor the LLC Indemnified Parties shall be liable to the Members or any of them for any claims, demands or costs arising from, or in any way connected with, the performance of the LLC under this Agreement other than actions, claims or demands based on gross negligence or willful misconduct; provided, however, that nothing herein shall limit or reduce the obligations of the LLC to the Members or any of them under the express terms of this Agreement or the PJM Tariff, including, but not limited to, those set forth in Sections 6.2 and 6.3 of this Agreement. 16.7 INSURANCE. The PJM Board shall be authorized to procure insurance against the risks borne by the LLC and the LLC Indemnified Parties, the cost of which shall be treated as a cost and expense of the LLC. 36 17. MEMBER REPRESENTATIONS, WARRANTIES AND COVENANTS 17.1 REPRESENTATIONS AND WARRANTIES. Each Member makes the following representations and warranties to the LLC and each other Member, as of the Effective Date or such later date as such Member shall become admitted as a Member of the LLC. 17.1.1 ORGANIZATION AND EXISTENCE. Such Member is an entity duly organized, validly existing and in good standing under the laws of the state of its organization. 17.1.2 POWER AND AUTHORITY. Such Member has the full power and authority to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby. 17.1.3 AUTHORIZATION AND ENFORCEABILITY. The execution and delivery of this Agreement by such Member and the performance of its obligations hereunder have been duly authorized by all requisite action on the part of the Member, and do not conflict with any applicable law or with any other agreement binding upon the Member. The Agreement has been duly executed and delivered by such Member and constitutes the legal, valid and binding obligation of such Member, enforceable against it in accordance with the terms thereof, except insofar as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and to general principles of equity whether such principles are considered in proceedings in law or in equity. 17.1.4 NO GOVERNMENT CONSENTS. No authorization, consent, approval or order of, notice to or registration, qualification, declaration or filing with, any governmental authority is required for the execution, delivery and performance by such Member of this Agreement or the carrying out by such Member of the transactions contemplated hereby other than such authorization, consent, approval or order of, notice to or registration, qualification, declaration or filing that is pending before such governmental authority. 17.1.5 NO CONFLICT OR BREACH. None of the execution, delivery and performance by such Member of this Agreement, the compliance with the terms and provisions hereof and the carrying out of the transactions contemplated hereby, conflicts or will conflict with or will result in a breach or violation of any of the terms, conditions or provisions of any law, governmental rule or regulation or the charter documents or bylaws of such Member or any applicable order, writ, injunction, judgment or decree of any court or governmental authority against such Member or by which it or any of its properties, is bound, or any loan agreement, indenture, mortgage, bond, note, resolution, contract or other agreement or instrument to which such Member is a party or by which it or any of its properties is bound, or constitutes or will constitute a default thereunder or will result in the imposition of any lien upon any of its properties. 37 17.1.6 NO PROCEEDINGS. There are no actions at law, suits in equity, proceedings or claims pending or, to the knowledge of the Member, threatened against the Member before any federal, state, foreign or local court, tribunal or government agency or authority that might materially delay, prevent or hinder the performance by the Member of its obligations hereunder. 17.2 MUNICIPAL ELECTRIC SYSTEMS. Any provisions of Section 17.1 notwithstanding, if any Member that is a municipal electric system believes in good faith that the provisions of Sections 5.1(b) and 16.1 of this Agreement may not lawfully be applied to that Member under applicable state law governing municipal activities, the Member may request a waiver of the pertinent provisions of the Agreement. Any such request for waiver shall be supported by an opinion of counsel for the Member to the effect that the provision of the Agreement as to which waiver is sought may not lawfully be applied to the Member under applicable state law. The PJM Board shall have the right to have the opinion of the Member's counsel reviewed by counsel to the LLC. If the PJM Board concludes that either or both of Sections 5.1(b) and 16.1 of this Agreement may not lawfully be applied to a municipal electric system Member, it shall waive the application of the affected provision or provisions to such municipal Member. Any Member not permitted by law to indemnify the other Members shall not be indemnified by the other Members. 17.3 SURVIVAL. All representations and warranties contained in this Section 17 shall survive the execution and delivery of this Agreement. 18. MISCELLANEOUS PROVISIONS 18.1 [RESERVED.] 18.2 FISCAL AND TAXABLE YEAR. The fiscal year and taxable year of the LLC shall be the calendar year. 18.3 REPORTS. Each year prior to the Annual Meeting of the Members, the PJM Board shall cause to be prepared and distributed to the Members a report of the LLC's activities since the prior report. 38 18.4 BANK ACCOUNTS; CHECKS, NOTES AND DRAFTS. (a) Funds of the LLC shall be deposited in an account or accounts of a type, in form and name and in a bank(s) or other financial institution(s) which are participants in federal insurance programs as selected by the PJM Board. The PJM Board shall arrange for the appropriate conduct of such accounts. Funds may be withdrawn from such accounts only for bona fide and legitimate LLC purposes and may from time to time be invested in such short-term securities, money market funds, certificates of deposit or other liquid assets as the PJM Board deems appropriate. All checks or demands for money and notes of the LLC shall be signed by any officer or by any other person designated by the PJM Board. (b) The Members acknowledge that the PJM Board may maintain LLC funds in accounts, money market funds, certificates of deposit, other liquid assets in excess of the insurance provided by the Federal Deposit Insurance Corporation, or other depository insurance institutions and that the PJM Board shall not be accountable or liable for any loss of such funds resulting from failure or insolvency of the depository institution. (c) Checks, notes, drafts and other orders for the payment of money shall be signed by such persons as the PJM Board from time to time may authorize. When the PJM Board so authorizes, the signature of any such person may be a facsimile. 18.5 BOOKS AND RECORDS. (a) At all times during the term of the LLC, the PJM Board shall keep, or cause to be kept, full and accurate books of account, records and supporting documents, which shall reflect, completely, accurately and in reasonable detail, each transaction of the LLC. The books of account shall be maintained and tax returns prepared and filed on the method of accounting determined by the PJM Board. The books of account, records and all documents and other writings of the LLC shall be kept and maintained at the principal office of the Interconnection. (b) The PJM Board shall cause the Office of the Interconnection to keep at its principal office the following: i) A current list in alphabetical order of the full name and last known business address of each Member, the Weighted Interest of each Member, and the Members Committee sector of each Voting Member; ii) A copy of the Certificate of Formation and the Certificate of Conversion, and all Certificates of Amendment thereto; iii) Copies of the LLC's federal, state, and local income tax returns and reports, if any, for the three most recent years; and iv) Copies of the Operating Agreement, as amended, and of any financial statements of the LLC for the three most recent years. 39 18.6 AMENDMENT. (a) Except as provided by law or otherwise set forth herein, this Agreement, including any Schedule hereto, may be amended, or a new Schedule may be created, only upon: (i) submission of the proposed amendment to the PJM Board for its review and comments; (ii) approval of the amendment or new Schedule by the Members Committee, after consideration of the comments of the PJM Board, in accordance with Section 8.4, or written agreement to an amendment of all Members not in default at the time the amendment is agreed upon; and (iii) approval and/or acceptance for filing of the amendment by FERC and any other regulatory body with jurisdiction thereof as may be required by law. If and as necessary, the Members Committee may file with FERC or other regulatory body of competent jurisdiction any amendment to this Agreement or to its Schedules or a new Schedule not filed by the Office of the Interconnection. (b) Notwithstanding the foregoing, an applicant eligible to become a Member in accordance with the procedures specified in this Agreement shall become a Member by executing a counterpart of this Agreement without the need for amendment of this Agreement or execution of such counterpart by any other Member. (c) Each of the following fundamental changes to the LLC shall require or be deemed to require an amendment to this Agreement and shall require the prior approval of FERC : i) Adoption of any plan of merger or consolidation; ii) Adoption of any plan of sale, lease or exchange of assets relating to all, or substantially all, of the property and assets of the LLC; iii) Adoption of any plan of division relating to the division of the LLC into two or more corporations or other legal entities; iv) Adoption of any plan relating to the conversion of the LLC into a stock corporation; v) Adoption of any proposal of voluntary dissolution; or vi) Taking any action which has the purpose or effect of the adoption of any plan or proposal described in items (i), (ii), (iii), (iv) or (v) above. 18.7 INTERPRETATION. Wherever the context may require, any noun or pronoun used herein shall include the corresponding masculine, feminine or neuter forms. The singular form of nouns, pronouns and verbs shall include the plural and vice versa. 18.8 SEVERABILITY. Each provision of this Agreement shall be considered severable and if for any reason any provision is determined by a court or regulatory authority of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions of this Agreement shall continue in full force and effect and shall in no way be affected, impaired or invalidated, and such invalid, void or unenforceable provision shall be replaced with valid and enforceable provision or provisions which otherwise give effect to the original intent of the invalid, void or unenforceable provision. 40 18.9 FORCE MAJEURE. No Member shall be liable to any other Member for damages or otherwise be in breach of this Agreement to the extent and during the period such Member's performance is prevented by any cause or causes beyond such Member's control and without such Member's fault or negligence, including but not limited to any act, omission, or circumstance occasioned by or in consequence of any act of God, labor disturbance, act of the public enemy, war, insurrection, riot, fire, storm or flood, explosion, breakage or accident to machinery or equipment, or curtailment, order, regulation or restriction imposed by governmental, military or lawfully established civilian authorities; provided, however, that any such foregoing event shall not excuse any payment obligation. Upon the occurrence of an event considered by a Member to constitute a force majeure event, such Member shall use due diligence to endeavor to continue to perform its obligations as far as reasonably practicable and to remedy the event, provided that no Member shall be required by this provision to settle any strike or labor dispute. 18.10 FURTHER ASSURANCES. Each Member hereby agrees that it shall hereafter execute and deliver such further instruments, provide all information and take or forbear such further acts and things as may be reasonably required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the terms hereof. 18.11 SEAL. The seal of the LLC shall have inscribed thereon the name of the LLC, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 18.12 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together will constitute one instrument, binding upon all parties hereto, notwithstanding that all of such parties may not have executed the same counterpart. 18.13 COSTS OF MEETINGS. Each Member shall be responsible for all costs of its representative, alternate or substitute in attending any meeting. The Office of the Interconnection shall pay the other reasonable costs of meetings of the PJM Board and the Members Committee, and such other committees, subcommittees, task forces, working groups, User Groups or other bodies as determined to be appropriate by the Office of the Interconnection, which costs otherwise shall be paid by the Members attending. The Office of the Interconnection shall reimburse all Board Members for their reasonable costs of attending meetings. 41 18.14 NOTICE. (a) Except as otherwise expressly provided herein, notices required under this Agreement shall be in writing and shall be sent to a Member by overnight courier, hand delivery, telecopier or other reliable electronic means to the representative on the Members Committee of such Member at the address for such Member previously provided by such Member to the other Members or as otherwise directed by the Members Committee. Any such notice so sent shall be deemed to have been given (i) upon delivery if given by overnight couriers or hand delivery, or (ii) upon confirmation if given by telecopier or other reliable electronic means. (b) Notices, as well as copies of the agenda and minutes of all meetings of committees, subcommittees, task forces, working groups, User Groups, or other bodies formed under this Agreement, shall be posted in a timely fashion on and made available for downloading from the PJM website. 18.15 HEADINGS. The section headings used in this Agreement are for convenience only and shall not affect the construction or interpretation of any of the provisions of this Agreement. 18.16 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended to be solely for the benefit of the Members and their respective successors and permitted assigns and, unless expressly stated herein, is not intended to and shall not confer any rights or benefits on any third party (other than successors and permitted assigns) not a signatory hereto. 18.17 CONFIDENTIALITY. 18.17.1PARTY ACCESS. No Member shall have a right hereunder to receive or review any documents, data or other information of another Member, including documents, data or other information provided to the Office of the Interconnection, to the extent such documents, data or information have been designated as confidential pursuant to the procedures adopted by the Office of the Interconnection or to the extent that they have been designated as confidential by such other Member; provided, however, a Member may receive and review any composite documents, data and other information that may be developed based on such confidential documents, data or information if the composite does not disclose any individual Member's confidential data or information. 42 18.17.2REQUIRED DISCLOSURE. (a) Notwithstanding anything in the foregoing Section to the contrary, if a Member or the Office of the Interconnection is required by applicable law, or in the course of administrative or judicial proceedings, to disclose information that is otherwise required to be maintained in confidence pursuant to this Agreement, that Member or the Office of the Interconnection may make disclosure of such information; provided, however, that as soon as the Member or the Office of the Interconnection learns of the disclosure requirement and prior to making disclosure, that Member or the Office of the Interconnection shall notify the affected Member or Members of the requirement and the terms thereof and the affected Member or Members may direct, at their sole discretion and cost, any challenge to or defense against the disclosure requirement. The disclosing Member and the Office of the Interconnection shall cooperate with such affected Members to the maximum extent practicable to minimize the disclosure of the information consistent with applicable law. Each Member and the Office of the Interconnection shall cooperate with the affected Members to obtain proprietary or confidential treatment of such information by the person to whom such information is disclosed prior to any such disclosure. (b) The Office of the Interconnection shall endeavor to impose on any contractors retained to provide technical support or otherwise to assist with the implementation or administration of this Agreement a contractual duty of confidentiality consistent with this Agreement. A Member shall not be obligated to provide confidential or proprietary information to any contractor that does not assume such a duty of confidentiality, and the Office of the Interconnection shall not provide any such information to any such contractor without the express written permission of the Member providing the information. 18.18 TERMINATION AND WITHDRAWAL. 18.18.1TERMINATION. Upon termination of this Agreement, final settlement for obligations under this Agreement shall include the accounting for the period ending with the last day of the last month for which the Agreement was effective. 18.18.2WITHDRAWAL. Subject to the requirements of Section 4.1(c) of this Agreement and Section 1.4.6 of the Schedule 1 to this Agreement, any Member may withdraw from this Agreement upon 90 days notice to the Office of the Interconnection. 43 18.18.3WINDING UP. Any provision of this Agreement that expressly or by implication comes into or remains in force following the termination or expiration of this Agreement shall survive such termination or expiration. The surviving provisions shall include, but shall not be limited to: (i) those provisions necessary to permit the orderly conclusion, or continuation pursuant to another agreement, of transactions entered into prior to the decision to terminate this Agreement, (ii) those provisions necessary to conduct final billing, collection, and accounting with respect to all matters arising hereunder, and (iii) the indemnification provisions as applicable to periods prior to such termination or expiration. IN WITNESS whereof, the Members have caused this Agreement to be executed by their duly authorized representatives. 44 EX-10.(L) 12 PP&L RESOURCES INC. - DIRECTORS DEFERRED COMPENSATION PLAN Exhibit 10(l) PP&L RESOURCES, INC. DIRECTORS DEFERRED COMPENSATION PLAN EFFECTIVE JANUARY 26, 1972 Amended and Restated Effective January 1, 1998 PP&L RESOURCES, INC. DIRECTORS DEFERRED COMPENSATION PLAN EFFECTIVE JANUARY 26, 1972 TABLE OF CONTENTS ----------------- PARAGRAPH PAGE - --------- ---- 1. Purpose...................................................... 1 2. Definitions.................................................. 2 3. Effective Date............................................... 5 4. Eligibility.................................................. 6 5. Mandatory Deferral........................................... 7 6. Deferred Cash Compensation................................... 8 7.1 Stock Account................................................ 10 7.2 Cash Account................................................. 11 8. Payment of Accounts.......................................... 13 9. Administration............................................... 16 10. Miscellaneous................................................ 17 11. Termination or Amendment..................................... 19 PP&L RESOURCES, INC. DIRECTORS DEFERRED COMPENSATION PLAN ------------------------------------ 1. PURPOSE. The purpose of this Directors Deferred Compensation Plan is to provide certain Directors of PP&L Resources, Inc. an additional means to increase their incomes after service as a Director, while at the same time increasing their equity interest in Resources, and to enable them to meet other important personal and financial needs. -1- 2. Definitions. (a) "BOARD OF DIRECTORS" means the board of directors of Resources. (b) "CASH ACCOUNT" means the account of Deferred Cash Compensation established for each Participant solely as a bookkeeping entry and described in Paragraph 7.2 of this Plan. (c) "CASH COMPENSATION" means the cash compensation payable to a Director, including retainer, meeting fees and other fees payable for service as Director as requested by Resources, minus the Mandatory Deferral Amount. (d) "COMMITTEE" means two or more directors, who have been designated by the Board to act as the Committee and who qualify as "non-employee directors," under the rules of the Securities and Exchange Commission issued pursuant to section 16 of the Securities Exchange Act of 1934. (e) "COMMON STOCK" means the Common Stock, without par value, of Resources. (f) "COMPENSATION" means the total compensation payable to a Director, including retainer, meeting fees and other fees payable for service as Director. (g) "DEFERRED CASH COMPENSATION" means the Cash Compensation of a Participant deferred under the terms of this Plan. (h) "DEFERRED SAVINGS PLAN" means the PP&L Deferred Savings Plan. (i) "DIRECTOR" means an individual elected to the Board of Directors who is not -2- an employee of Resources or who served on the Board of Directors of PP&L prior to the Effective Time and was not an employee of PP&L. (j) "EBPB" means the Employee Benefit Plan Board, the members of which are appointed by the board of directors of PP&L. (k) "EFFECTIVE TIME" means the date as defined in the Agreement and Plan of Exchange between PP&L, Inc. and PP&L Resources, Inc. (l) "FAIR MARKET VALUE" on any date means the mean of the high and the low sale prices of Common Stock on the New York Stock Exchange composite tape on such date if such date is a day on which the common stock actually trades or otherwise on the next preceding date on which the common stock trades. If, as of any valuation date, the Common Stock is not traded on the New York Stock Exchange, valuations shall be based on the mean of the high and low sale prices on the principal national securities exchange on which the Common Stock is then traded or, if the Common Stock is not traded on any national securities exchange, on the mean of the high and low bid prices of the Common Stock in the over-the-counter market. (m) "MANDATORY DEFERRAL AMOUNT" means a portion of the retainer fee payable to the Participant equal to an amount established by resolution of the Committee from time to time, but in no event later than December 31 of the calendar year preceding the calendar year in which the retainer fee is payable to the Participant. -3- (n) "PARTICIPANT" means an eligible Director of Resources, any or all of whose Compensation is deferred under this Plan. (o) "PLAN" means this Directors Deferred Compensation Plan as set forth herein and as hereafter amended from time to time. (p) "PP&L" means PP&L, Inc. (q) "RESOURCES" means PP&L Resources, Inc. (r) "STOCK ACCOUNT" means the account of Deferred Compensation established for each Participant solely as a bookkeeping entry and described in Paragraph 7.1 of this Plan. (s) "STOCK UNIT" means a unit equal in value from time-to-time to the Fair Market Value of one share of Common Stock. (t) "TOTAL AMOUNT PAYABLE" means the amount credited to a Participant's Cash Account and the Participant's Stock Account. The masculine pronoun shall be deemed to include the feminine and the singular to include the plural unless a different meaning is plainly required by the context. -4- 3. EFFECTIVE DATE. The amendments to this Plan necessary to make it a Plan of PP&L Resources, Inc. rather than PP&L are effective as of the Effective Time. The Plan, as hereby amended and restated to provide for a Stock Account, shall become effective as of January 1, 1998. -5- 4. ELIGIBILITY. All Directors of Resources who are or become duly elected Directors shall be eligible to participate in this Plan as of the effective date of first election as a Director. An employee of PP&L or Resources who is a member of the Board of Directors who retires or otherwise terminates his employment but continues as a member of the Board shall be eligible to participate as of the date of his termination of employment with PP&L or Resources. -6- 5. MANDATORY DEFERRAL. (a) A Participant's Mandatory Deferral Amount shall automatically be deferred to such Participant's Stock Account on the date such amount would otherwise be payable to such Participant. Mandatory Deferral Amounts shall be subject to the rules set forth in this Plan, and each Participant shall have the right to receive payments of Common Stock on account of Mandatory Deferral Amounts under the circumstances hereinafter set forth. (b) A Participant may not convert any portion of such Participant's Stock Account attributable to the Mandatory Deferral Amount or dividends thereon, as described in Paragraph 7.1(c), to the Participant's Cash Account for a period of 3 years from the date such Mandatory Deferral Amount was credited to the Participant's Stock Account. -7- 6. DEFERRED CASH COMPENSATION. (a) Participant shall have the right to elect to have all, or a portion, of his Cash Compensation deferred hereunder, either to his Stock Account or his Cash Account and may change the allocation between such accounts of any such Cash Compensation so deferred. The amount of Cash Compensation credited to either the Stock Account or the Cash Account will be limited to the Cash Compensation earned after the date of the election. (b) Any election to defer future Cash Compensation for the first calendar year that Participant is eligible to participate in this Plan shall be made by the Participant in writing by the thirtieth (30th) day following the date on which the Participant is first eligible to participate by filing with the EBPB the appropriate election form. Any such election shall be limited to Cash Compensation earned after the date of the election. (c) Any election to defer or change the amount of Cash Compensation to be deferred for any subsequent calendar year after the first calendar year of eligibility may be made by Participant not later than December 31 of the year preceding such calendar year by filing with the EBPB an election form; provided, however, that an election once made will be presumed to continue with respect to subsequent years unless changed or revoked by Participant. Participant, may, prior to December 31, 1994, elect to defer some or all of his Cash Compensation otherwise payable after July 1, 1995 to this Stock Account. -8- (d) Participant may revoke his election to defer Cash Compensation at any time by so notifying the EBPB in writing not later than December 31 of the year preceding the year for which the revocation will be effective. For any subsequent calendar year, Participant may resume his election to defer if he files with the EBPB an election form not later than December 31 of the year preceding such subsequent calendar year. (e) The deferral of Cash Compensation shall be made in amounts elected for the calendar year in which such Cash Compensation is to be earned, unless the election specifies otherwise. (f) Any election will be effective when actually received by PP&L's Payroll Section. (g) An election, once made, will be irrevocable as to Cash Compensation already deferred. -9- 7.1 STOCK ACCOUNT. Resources shall maintain a Stock Account in the name of each Participant. Such Stock Account shall be maintained as follows: (a) Resources shall credit to Participant's Stock Account the number of Stock Units equal to the Mandatory Deferral Amount on the date such amount would otherwise be payable to such Participant, divided by the Fair Market Value of one share of Common Stock on such date. (b) Resources shall credit to Participant's Stock Account, the number of Stock Units equal to the amount of Deferred Cash Compensation elected by Participant to be credited to his Stock Account, divided by the Fair Market Value of one share of Common Stock on such date. (c) As of each date a dividend or other distribution is paid or made on Common Stock to holders of record on and after the date of deferral hereunder, the Participant's Stock Account shall be credited with a number of additional Stock Units equal to the product of: (i) the amount of such dividend or distribution paid with respect to one share of Common Stock, multiplied by (ii) the number of Stock Units held by the Participant, divided by (iii) the Fair Market Value of one share of Common Stock on such date. If an in-kind dividend or distribution is made on Common Stock, the Fair Market Value of such in-kind dividend or distribution paid with respect to one share of Common Stock will be equal to the amount of the dividend or distribution for purposes of subparagraph (i) of this Section. (d) Subject to the limitations of Paragraph 5(b) and provided that such an -10- election is at least six months after the date of such Participant's last election, if any, to convert all or any portion of his Cash Account into interests in his Stock Account, a Participant may elect to convert all or any portion of his Stock Account into interests in such Participant's Cash Account by filing with the EBPB an election form. If such an election is made, the Participant's Cash Account shall be credited with an amount equal to the number of Stock Units being converted, multiplied by the Fair Market Value of one share of Common Stock on the date such amount is credited. 7.2 CASH ACCOUNT. Resources shall maintain a Cash Account in the name of each Participant. Such Cash Account shall be maintained as follows: (a) Resources shall credit to Participant's Cash Account as of the same day on which the last Cash Compensation for the month would have been paid to said Participant an amount equal to the Deferred Cash Compensation elected by Participant to be credited to his Cash Account. (b) Participant's Cash Account shall be credited with interest monthly based on a rate of interest substantially equivalent to that applied on account balances in the Blended Interest Rate Fund in the Deferred Savings Plan or such other comparable fund as may be selected by the EBPB. (c) Provided that such an election is at least six months after the date of such Participant's last election, if any, to convert all or any portion of his Stock Account into interests in his Cash Account, a Participant may elect to -11- convert all or any portion of his Cash Account into interests in such Participant's Stock Account by filing with the EBPB an election form. If such an election is made, the Participant's Stock Account shall be credited with a number of Stock Units equal to the Cash Account amount to be converted, divided by the Fair Market Value of one share of Common Stock on such date. -12- 8. PAYMENT OF ACCOUNTS. (a) The Total Amount Payable shall be payable at the election of the Participant within thirty (30) days after: (i) Participant ceases serving on the Board of Directors; or (ii) the later of: (A) the Participant's cessation of service on the Board of Directors; or (B) the age elected by the Participant, provided such age is not greater than 72. Such election must be made before the applicable Cash Compensation is deferred and may not be changed with respect to Cash Compensation once it has been deferred. The Participant may defer commencement of distribution until January of the next calendar year after such event occurs. If the Participant has made no election, payments will commence within thirty (30) days after a Participant ceases to be a Director. (b) (i) The Total Amount Payable shall be paid to the Participant in a single sum or, if elected by the Participant, in annual installments up to a maximum of ten (10) years. Such election must be made before the applicable Cash Compensation is deferred and may not be changed with respect to Cash Compensation once it has been deferred. (ii) Payments in respect of the Stock Account shall be made in Common Stock and payments in respect of the Cash Account shall be made in cash. A Participant shall receive a number of shares of Common -13- Stock equal to the number of Stock Units in his Stock Account. (iii) All annual installments shall, except for the final payment, be not less than $5,000. To the extent necessary, the number of annual installments may be reduced to ensure that annual installments are at least $5,000. (iv) The amount of each annual installment shall be determined by dividing the Total Amount Payable less any payments already made to Participant by the remaining number of annual installments to be made (i.e., a 10-year payout shall pay 1/10 of the Total Amount Payable as the first installment, 1/9 as the second annual installment, etc.). (c) (i) If Participant dies while a Director or before all installments have been paid under Paragraph 8(b), payments shall be made to Participant's estate within 30 days after Participant's death. (ii) Payments made to Participant's estate will be made in a single sum. (d) As long as there is a balance in Participant's Cash Account, the balance shall be credited with interest pursuant to Paragraph 7.2(b). For any installment or other payment from the Cash Account, interest shall accrue up to the last day of the month prior to that payment to Participant or his estate. As long as there is a balance in Participant's Stock Account, the remaining balance shall be credited with dividend amounts pursuant to Paragraph 7.1(c). (e) The EBPB may determine, in its sole discretion, that the Total Amount -14- Payable shall be paid to Participant or his estate in different amounts or at different times than provided under this Plan if, in the opinion of the EBPB, it would be necessary as the result of a personal emergency or hardship which results in a severe and immediate financial burden to the Participant, in which case payment shall be made only to the extent necessary to alleviate the Participant's hardship. Any determination by EBPB to change the amount or timing of a Participant's distribution shall not, however, result in the Participant receiving distributions in lesser amounts or over a longer period of time. -15- 9. ADMINISTRATION. The EBPB shall have the discretionary authority and final right to interpret, construe and make benefit determinations (including eligibility and amount) under the Plan. The decisions of the EBPB are final and conclusive for all purposes. -16- 10. MISCELLANEOUS. (a) If the person to receive payment is deemed by the EBPB or is adjudged to be legally incompetent, the payments shall be made to the duly appointed guardian or committee of such incompetent, or they may be made to such person or persons whom the EBPB believes are caring for or supporting the incompetent. (b) Nothing in this Plan shall confer any right on the Participant to continue as a Director. (c) The expenses of the administration hereunder shall be borne by Resources. (d) This Plan shall be construed, administered and enforced according to the laws of the Commonwealth of Pennsylvania. (e) All payments from this Plan shall be made from the general assets of Resources. This Plan shall not require Resources to set aside, segregate, earmark, pay into trust or special account or otherwise restrict the use of its assets in the operation of the business. Participants shall have no greater right or status than as an unsecured general creditor of Resources with respect to any amounts owed to Participant hereunder. (f) The Plan shall be unfunded. (g) All payments to persons entitled to benefits hereunder shall be made to such persons and shall not be grantable, transferable, pledged or otherwise assignable in anticipation of payment thereof, or subject to attachment, alienation, garnishment, levy, execution or other legal or equitable process -17- in whole or in part, by the voluntary or involuntary acts of any such persons, or by operation of law, and shall not be liable or taken for any obligation of such person. Resources will observe the terms of the Plan unless and until ordered to do otherwise by a state or federal court. As a condition of participation, a Participant agrees to hold Resources harmless from any claim that arises out of Resources obeying any such order whether such order effects a judgment of such court or is issued to enforce a judgment or order of another court. (h) Participant's benefits under group life insurance, and other benefit plans as may be maintained by Resources for Directors will be provided based on all Compensation to Participant. -18- 11. TERMINATION OR AMENDMENT. (a) The Committee may, in its discretion, terminate or amend this Plan from time to time. In addition, the EBPB may make such amendments to the Plan as it deems necessary or desirable except those amendments which substantially increase the cost of the Plan to Resources or significantly alter the benefit design or eligibility requirements of the Plan. No termination or amendment shall (without Participant's consent) alter: a) Participant's right to payments of amounts previously credited to Participant's Accounts, which amounts shall continue to earn interest or accumulate dividends as provided for herein as though termination or amendment had not been effected, or b) the amount or times of payment of such amounts which have commenced prior to the effective date of such termination or amendment; provided, however, that no such consent may accelerate the Participant's payments. Notwithstanding the foregoing, if Resources is liquidated, the EBPB shall have the right to determine the Total Amount Payable under Paragraph 8 to Participant, and to cause the amount so determined to be paid in one or more installments or upon such other terms and conditions and at such other time (not beyond the time provided for herein) as the EBPB determines to be just and equitable. Any determinations made pursuant to the preceding sentence shall be consistent as to all Participants. -19- Executed this ______ day of November, 1998. PP&L RESOURCES, INC. By: -------------------------------------- John M. Chappelear Chairman Employee Benefit Plan Board 11/03/98 -20- EX-10.(M).1 13 PP&L INC. - OFFICERS DEFERRED COMPENSATION PLAN PP&L OFFICERS DEFERRED COMPENSATION PLAN EFFECTIVE JULY 1, 1985 Amended and Restated Effective January 1, 1998 PP&L OFFICERS DEFERRED COMPENSATION PLAN EFFECTIVE JULY 1, 1985 TABLE OF CONTENTS ----------------- PARAGRAPH PAGE - --------- ---- 1. Purpose.......................................... 1 2. Definitions...................................... 2 3. Eligibility...................................... 5 4. Deferred Cash Compensation and Deferred Cash Awards............................. 6 5. Account.......................................... 8 6. Payment of Account - General Provisions..........10 7. Supplemental Payments............................13 8. Administration...................................15 9. Miscellaneous....................................16 10. Termination or Amendment.........................18 11. Effective Date...................................19 PP&L OFFICERS DEFERRED COMPENSATION PLAN ----------------------------------- 1. Purpose. The purpose of this Officers Deferred Compensation Plan is to provide certain executive officers of PP&L, Inc. an additional means to increase their incomes after retirement or disability, and in order to meet other important personal and financial needs. -1- 2. DEFINITIONS. (a) "Account" means the account of Deferred Cash Compensation and Deferred Cash Awards established solely as a bookkeeping entry and maintained under paragraph 5 of this Plan. (b) "Cash Award" means any incentive awards payable under the executive incentive awards program prior to any deferrals under this Plan. (c) "Cash Compensation" means base salary prior to any deferrals to this Plan or the Deferred Savings Plan. (d) "Change in Control" - means any one of the following events: (a) any change in control of Resources of a nature that would be required to be reported in response to Item 1(a) of Form 8-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Resources cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; (c) any person (within the meaning of section 13(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of Resources representing 20% or more of the combined voting power of Resources' then outstanding securities entitled to vote generally in the election of directors; (d) the approval by the -2- stockholders of Resources of any merger or consolidation of Resources with any other corporation or the sale or other disposition of all or substantially all of the assets of Resources to any other person or persons unless, after giving effect thereto, (1) holders of Resources' then outstanding securities entitled to vote generally in the election of directors will own a majority of the outstanding stock entitled to vote generally in the election of directors of the continuing, surviving or transferee corporation or any parent (within the meaning of Rule 12b-2 under the Exchange Act) thereof and (2) the incumbent members of the Board of Resources as constituted immediately prior thereto shall constitute at least a majority of the directors of the continuing, surviving or transferee corporation and any parent thereof; or (e) the Board of Resources adopts a resolution to the effect that a "Change in Control" has occurred or is anticipated to occur. (e) "PP&L" means PP&L, Inc. (f) "Deferred Cash Award" means the Cash Award of a Participant deferred under paragraph 4 of this Plan. (g) "Deferred Cash Compensation" means the Cash Compensation of a Participant deferred under paragraph 4 of this Plan. (h) "Deferred Savings Plan" means the PP&L Deferred Savings Plan. (i) "EBPB" means Employee Benefit Plan Board, the members of which are appointed by the Board of Directors of PP&L. -3- (j) "ESOP" means the PP&L Employee Stock Ownership Plan. (k) "Participant" means an eligible officer of PP&L who elects to defer Cash Compensation and/or Cash Awards under this Plan. (l) "Plan" means this Officers Deferred Compensation Plan as set forth herein and as hereafter amended from time to time. (m) PP&L "PP&L Resources" shall mean PP&L Resources, Inc. (n) "Retirement Plan" means the PP&L Retirement Plan. (o) "Total Amount Payable" means the amount credited to a Participant's Account plus interest. The masculine pronoun shall be deemed to include the feminine and the singular to include the plural unless a different meaning is plainly required by the context. -4- 3. ELIGIBILITY. All officers of PP&L who are or become officers in Salary Grades I through IV shall be eligible to participate in this Plan as of the later of September 1, 1985 or the effective date of first election to a position within said Salary Grades. -5- 4. DEFERRED CASH COMPENSATION AND DEFERRED CASH AWARDS. (a) Participant shall have the right to elect to have all, or a portion, of his Cash Compensation in excess of $20,000 deferred hereunder. (b) Participant shall have the right to elect to have all, or a portion, of his Cash Awards deferred hereunder. (c) Any election to defer future Cash Compensation and/or Cash Awards for the first calendar year that Participant is eligible to participate in this Plan shall be made by the Participant in writing by the thirtieth (30th) day following the date on which the Participant is first eligible to participate by filing with the EBPB the appropriate election form. Any such election shall be limited to Cash Compensation and Cash Awards earned after the date of the election. (d) Any election to defer or change the amount of Cash Compensation and/or Cash Awards to be deferred for any subsequent calendar year after the first calendar year of eligibility may be made by Participant not later than December 31 of the year preceding such calendar year by filing with the EBPB an election form; provided, however, that an election once made will be presumed to continue unless changed or revoked by Participant. (e) Participant may revoke his election to defer Cash Compensation and/or Cash Awards at any time by so notifying the EBPB in writing not later than December 31 of the year preceding the year for which the revocation will be effective. For any subsequent calendar year, -6- Participant may resume his election to defer if he files with the EBPB an election form not later than December 31 of the year preceding such subsequent calendar year. (f) The deferral of Cash Compensation shall be made in equal amounts in each bi-weekly pay period during the calendar year in which such Cash Compensation is to be earned, unless the election specifies otherwise. (g) Any election is filed with the EBPB and will be effective when actually received by PP&L's Payroll Section. (h) Such an election, once made, will be irrevocable as to Cash Compensation and Cash Awards already deferred. (i) Deferred Cash Compensation and Deferred Cash Awards shall be subject to the rules set forth in this Plan, and each Participant shall have the right to receive cash payments on account of Deferred Cash Compensation and Deferred Cash Awards only in the amounts and under the circumstances hereinafter set forth. -7- 5. ACCOUNT. PP&L shall maintain an Account in the name of each Participant. Such Account shall be maintained as follows: (a) PP&L shall credit the Deferred Cash Compensation to Participant's Account as of the same day on which the last Cash Compensation for the month would have been paid to said Participant. (b) PP&L shall credit the Deferred Cash Award to Participant's Account as of the same day that all Cash Awards not being deferred are paid. (c) Within sixty (60) days of the close of any calendar year during which Participant authorized salary reduction contributions to the Deferred Savings Plan, PP&L will credit Participant's Account with the difference, if any, between PP&L matching contributions Participant would have received for the prior calendar year under the Deferred Savings Plan if Participant had participated in the Deferred Savings Plan based on Participant's Cash Compensation and the actual PP&L matching contributions allocated to Participant's Account in the Deferred Savings Plan for the prior calendar year. Participant will forfeit any such allocation to his Account if Participant terminates employment with PP&L at a time when PP&L matching contributions under the Deferred Savings Plan are not vested under that plan. (d) At the time when any allocations are made under ESOP for contributions under Article IV of that plan, PP&L will credit Participant's Account with an amount equal to the difference, if any, between the value of PP&L -8- contributions that would have been made under ESOP based on Participant's Cash Compensation and the value of PP&L contributions actually made for Participant under ESOP. (e) Participant's Account shall be credited with interest quarterly based on a rate of interest substantially equivalent to that applied on account balances in the Blended Interest Rate Fund in the Deferred Savings Plan or such other comparable fund as may be selected by the EBPB. -9- 6. PAYMENT OF ACCOUNT GENERAL PROVISIONS (a) The Total Amount Payable shall be payable to Participant: (i) if Participant becomes totally disabled while employed by PP&L or an Affiliated Company, as determined by the EBPB in its discretion; (ii) if Participant retires from PP&L and all Affiliated Companies under the Retirement Plan; or (iii) if Participant resigns or otherwise ceases employment with PP&L and all Affiliated Companies; within thirty (30) days of such event or in the January of the calendar year following such event, as elected by Participant. Such election must be made before the applicable Cash Compensation and/or Cash Award is deferred and may not be changed with respect to Cash Compensation and/or Cash Award once it has been deferred. If Participant has made no election, payments will commence within thirty (30) days after cessation of employment. (b) (i) The Total Amount Payable shall be paid to Participant in a single sum or in annual installments up to a maximum of fifteen (15) years, as elected by the Participant. Such election must be made before the applicable Cash Compensation and/or Cash Award is deferred and may not be changed with respect to Cash Compensation and/or Cash Award once it has been deferred. (ii) All annual installments shall, except for the final payment, be not -10- less than $5,000. To the extent necessary, the number of annual installments may be reduced to insure that annual installments are at least $5,000. (iii) The amount of each annual installment shall be determined by dividing the Total Amount Payable less any payments already made to Participant by the remaining number of annual installments to be made (i.e., a 10 year payout shall pay 1/10 of the Total Amount Payable as the first installment, 1/9 as the second annual installment, etc.). (c) (i) If Participant dies while employed by PP&L or an Affiliated Company or before all installments have been paid under paragraph 5(b), payments shall be made within 30 days after Participant's death to the beneficiary designated in writing by Participant. Participant shall have a continuing power to designate a new beneficiary in the event of his death at any time prior to his death by written instrument delivered by Participant to the EBPB without the consent or approval of any person theretofore named as his beneficiary. In the event the designated beneficiary does not survive Participant, payment will be made to an alternate beneficiary designated in writing by Participant. If no such designation is in effect at the time of death of Participant, or if no person so designated shall survive Participant, payment shall be made to Participant's estate. -11- (ii) Payments made to Participant's designated beneficiary will be made at the times and in the amounts as if Participant were living based on Participant's elected form of distribution; provided, however, if payments are to be made to Participant's estate, payment will be made in a single sum. (d) So long as there is a balance in Participant's Account, the balance shall be credited with interest pursuant to paragraph 5(d). For any installment or other payment from the Account, interest shall accrue up to the last day of the month prior to that payment to Participant or his beneficiary. (e) The EBPB may determine, in its sole discretion, that the Total Amount Payable shall be paid to a Participant or his beneficiary in different amounts or at different times than provided under this Plan if, in the opinion of the EBPB, it would be necessary as the result of a personal emergency or hardship which results in a severe and immediate financial burden to the Participant in which case payment shall be made only to the extent necessary to alleviate the Participant's hardship. -12- 7. SUPPLEMENTAL PAYMENTS. (a) Upon his retirement under the Retirement Plan or PP&L's Supplemental Executive Retirement Plan or upon his death while still employed by PP&L or an Affiliated Company, Participant and/or his beneficiaries shall be paid a monthly supplemental retirement benefit (or supplemental pre-retirement spouse's annuity, as the case may be) equal to the difference, if any, between the benefit which would have been payable to him under such plan if the Participant's Deferred Cash Compensation had been included in the Participant's compensation for such plan and the benefit actually payable to the Participant and/or his beneficiaries thereunder. Such supplemental retirement benefit shall be payable in accordance with all the terms and conditions applicable to the Participant's or his beneficiary's benefit under the Retirement Plan, including any optional form of payment. If such supplemental retirement payments would be less than one hundred dollars ($100) per month, the EBPB, in its discretion, may elect to make such monthly supplemental retirement payments in such installments as the EBPB may determine or in a single lump-sum payment. Notwithstanding the foregoing, in the event that Participant's benefits under the Retirement Plan are subject to a qualified domestic relations order, any supplemental retirement benefits payable under this paragraph shall be calculated and made without regard to such order. -13- (b) Any Participant who terminates employment with PP&L (by retirement or otherwise) under circumstances where PP&L has requested or demanded such termination of employment for proper cause (including, without limitation, theft, fraud, breach of any fiduciary duty, misrepresentation, deceit, illegal or criminal act(s)) shall have no right to receive any payment from this Plan under paragraph 7(a). The preceding sentence shall not apply to any Participant who terminates employment with PP&L within three (3) years after the effective date of a Change in Control. -14- 8. ADMINISTRATION. The Employee Benefit Plan Board shall have the discretionary authority and final right to interpret, construe and make benefit determinations (including eligibility and amount) under the Plan. The decisions of the Employee Benefit Plan Board are final and conclusive for all purposes. If one or more members of the EBPB are disqualified by personal interest from taking part in a particular decision, the remaining member or members of the EBPB (although less than a quorum) shall have full power to act on the matter. -15- 9. MISCELLANEOUS. (a) If the person to receive payment is a minor, or is deemed by the EBPB or is adjudged to be legally incompetent, the payments shall be made to the duly appointed guardian or committee of such minor or incompetent, or they may be made to such person or persons who the EBPB believes are caring for or supporting such minors or incompetents. (b) Nothing in this Plan shall confer any right on any Participant to continue in PP&L's employ or to receive compensation, nor shall anything in this Plan affect in any way the right of PP&L to terminate any Participant's employment at any time. (c) The expenses of administration hereunder shall be borne by PP&L. (d) This Plan shall be construed, administered and enforced according to the laws of the Commonwealth of Pennsylvania. (e) All payments from this Plan shall be made from the general assets of PP&L. This Plan shall not require PP&L to set aside, segregate, earmark, pay into trust or special account or otherwise restrict the use of its assets in the operation of the business. Participant shall have no greater right or status than as an unsecured general creditor of PP&L with respect to any amounts owed to Participant hereunder. (f) All payments to persons entitled to benefits hereunder shall be made to such persons and shall not be grantable, transferable, pledged or otherwise assignable in anticipation of payment thereof, or subject to -16- attachment, alienation, garnishment, levy, execution or other legal or equitable process in whole or in part, by the voluntary or involuntary acts of any such persons, or by operation of law, and shall not be liable or taken for any obligation of such person. PP&L will observe the terms of the Plan unless and until ordered to do otherwise by a state or federal court. As a condition of participation, a Participant agrees to hold PP&L harmless from any claim that arises out of PP&L's obeying any such order whether such order effects a judgment of such court or is issued to enforce a judgment or order of another court. (g) Participant's benefits under group life insurance, accidental death and disability, short term disability, long term disability and other similar employee benefit plans maintained by PP&L will be provided based on Cash Compensation to Participant. -17- 10. TERMINATION OR AMENDMENT. The Board of Directors may, in its discretion, terminate and amend this Plan from time to time. In addition, the EBPB may make such amendments to the Plan as it deems necessary or desirable except those amendments which substantially increase the cost of the Plan to PP&L or significantly alter the benefit design or eligibility requirements of the Plan. No termination or amendment shall (without Participant's consent) alter: a) Participant's right to payments of amounts previously credited to Participant's Account, which amounts shall continue to earn interest as provided for herein as though termination or amendment had not been effected, b) the amount or times of payment of such amounts which have commenced prior to the effective date of such termination or amendment, or c) the rights set forth in paragraph 5 to designate beneficiaries in the event of Participant's death or alter Participant's right to monthly supplemental payments under paragraph 7; provided, however, that no such consent may accelerate the Participant's payments. Notwithstanding the foregoing, if PP&L is liquidated, the EBPB shall have the right to determine the Total Amount Payable and any monthly supplemental payments payable under paragraph 7 to Participant, and to cause the amount so determined to be paid in one or more installments or upon such other terms and conditions and at such other time (not beyond the time provided for herein) as the EBPB determines to be just and equitable. Any determinations made pursuant to the preceding sentence shall be consistent as to all Participants. -18- 11. EFFECTIVE DATE. The effective date of this Plan is January 1, 1998. Executed this ______ day of _______________, 1998. PP&L, INC. By: ---------------------------------- John M. Chappelear Vice President - Investments & Pensions -19- EX-10.(M).2 14 AMENDMENT NO. 1 TO PP&L OFFICERS DEFERRED COMPENSATION PLAN Exhibit 10(m)-2 AMENDMENT NO. 1 TO PP&L OFFICERS DEFERRED COMPENSATION PLAN WHEREAS, PP&L, Inc. ("Company") has adopted the PP&L Officers Deferred Compensation Plan ("Plan") effective July 1, 1985; and WHEREAS, the Plan was amended and restated effective January 1, 1999; and WHEREAS, the Company desires to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective September 14, 1998, Articles 1, 2, 3, 5, 7, 9 and 10 are amended to read: 1. PURPOSE. The purpose of this Officers Deferred Compensation Plan is to provide certain executive officers of PP&L, Inc. and other Participating Companies an additional means to increase their incomes after retirement or disability, and in order to meet other important personal and financial needs. 2. DEFINITIONS. (a) "ACCOUNT" means the account of Deferred Cash Compensation and Deferred Cash Awards established solely as a bookkeeping entry and maintained under paragraph 5 of this Plan. (b) "AFFILIATED COMPANY" OR "AFFILIATED COMPANIES" shall mean any parent or subsidiaries of PP&L (or companies under common control with PP&L) which are members of the same controlled group of corporations (within the meaning of section 1563(a) of the Code) as PP&L. (c) "CASH AWARD" means any incentive awards payable under the executive incentive awards program prior to any deferrals under this Plan. (d) "CASH COMPENSATION" means base salary prior to any deferrals to this Plan or the Deferred Savings Plan. (e) "CHANGE IN CONTROL" means any one of the following events: (a) any -1- change in control of Resources of a nature that would be required to be reported in response to Item 1(a) of Form 8-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Resources cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; (c) any person (within the meaning of section 13(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of Resources representing 20% or more of the combined voting power of Resources' then outstanding securities entitled to vote generally in the election of directors; (d) the approval by the stockholders of Resources of any merger or consolidation of Resources with any other corporation or the sale or other disposition of all or substantially all of the assets of Resources to any other person or persons unless, after giving effect thereto, (1) holders of Resources' then outstanding securities entitled to vote generally in the election of directors will own a majority of the outstanding stock entitled to vote generally in the election of directors of the continuing, surviving or transferee corporation or any parent (within the meaning of Rule 12b-2 under the Exchange Act) thereof and (2) the incumbent members of the Board of Resources as constituted immediately prior thereto shall constitute at least a majority of the directors of the continuing, surviving or transferee corporation and any parent thereof; or (e) the Board of Resources adopts a resolution to the effect that a "Change in Control" has occurred or is anticipated to occur. (f) "DEFERRED CASH AWARD" means the Cash Award of a Participant deferred under paragraph 4 of this Plan. (g) "DEFERRED CASH COMPENSATION" means the Cash Compensation of a Participant deferred under paragraph 4 of this Plan. (h) "DEFERRED SAVINGS PLAN" means the PP&L Deferred Savings Plan. (i) "EBPB" means Employee Benefit Plan Board, the members of which are appointed by the Board of Directors of PP&L. (j) "ESOP" means the PP&L Employee Stock Ownership Plan. (k) "PARTICIPANT" means an eligible officer of a Participating Company who elects to defer Cash Compensation and/or Cash Awards under this Plan. -2- (l) "PARTICIPATING COMPANY" means PP&L, PP&L EnergyPlus Co., and each other Affiliated Company that is designated by the Board of Directors of PP&L to adopt this Plan by action of its board of directors or other governing body. (m) "PLAN" means this Officers Deferred Compensation Plan as set forth herein and as hereafter amended from time to time. (n) "PP&L" means PP&L, Inc. (o) "PP&L RESOURCES" shall mean PP&L Resources, Inc. (p) "RETIREMENT PLAN" means the PP&L Retirement Plan. (q) "TOTAL AMOUNT PAYABLE" means the amount credited to a Participant's Account plus interest. The masculine pronoun shall be deemed to include the feminine and the singular to include the plural unless a different meaning is plainly required by the context. 3. ELIGIBILITY. All officers of PP&L in PP&L Salary Grades I through IV and any officer of a Participating Company who is designated as eligible in a resolution adopted by the board of directors of such Participating Company shall be eligible to participate in this Plan. 5. ACCOUNT. PP&L shall maintain an Account in the name of each Participant. Such Account shall be maintained as follows: (c) Within sixty (60) days of the close of any calendar year during which Participant authorized salary reduction contributions to the Deferred Savings Plan, PP&L will credit Participant's Account with the difference, if any, between the Participating Company matching contributions Participant would have received for the prior calendar year under the Deferred Savings Plan if Participant had participated in the Deferred Savings Plan based on Participant's Cash Compensation and the actual Participating Company matching contributions allocated to Participant's Account in the Deferred Savings Plan for the prior calendar year. Participant will forfeit any such allocation to his Account if Participant terminates employment with all Participating Companies at a time when Participating Company matching contributions under the Deferred Savings Plan are not vested under that plan. -3- (d) At the time when any allocations are made under ESOP for contributions under Article IV of that plan, PP&L will credit Participant's Account with an amount equal to the difference, if any, between the value of PP&L contributions that would have been made under ESOP based on Participant's Cash Compensation and the value of PP&L contributions actually made for Participant under ESOP. 7. SUPPLEMENTAL PAYMENTS. (b) Any Participant who terminates employment with PP&L or an Affiliated Company (by retirement or otherwise) under circumstances where PP&L or an Affiliated Company has requested or demanded such termination of employment for proper cause (including, without limitation, theft, fraud, breach of any fiduciary duty, misrepresentation, deceit, illegal or criminal act(s)) shall have no right to receive any payment from this Plan under paragraph 7(a). The preceding sentence shall not apply to any Participant who terminates employment with PP&L or an Affiliated Company within three (3) years after the effective date of a Change in Control. 9. MISCELLANEOUS. (a) If the person to receive payment is a minor, or is deemed by the EBPB or is adjudged to be legally incompetent, the payments shall be made to the duly appointed guardian or committee of such minor or incompetent, or they may be made to such person or persons who the EBPB believes are caring for or supporting such minors or incompetents. (b) Nothing in this Plan shall confer any right on any Participant to continue in PP&L's or in an Affiliated Company's employ or to receive compensation, nor shall anything in this Plan affect in any way the right of PP&L or an Affiliated Company to terminate any Participant's employment at any time. (c) The expenses of administration hereunder shall be borne by PP&L. (d) This Plan shall be construed, administered and enforced according to the laws of the Commonwealth of Pennsylvania. (e) All payments from this Plan shall be made from the general assets of PP&L or an Affiliated Company. This Plan shall not require PP&L or an Affiliated Company to set aside, segregate, earmark, pay into trust or special account or otherwise restrict the use of its assets in the operation of the business. Participant shall have no greater right or status than as -4- an unsecured general creditor of PP&L or an Affiliated Company with respect to any amounts owed to Participant hereunder. 10. TERMINATION OR AMENDMENT. The Board of Directors may, in its discretion, terminate and amend this Plan from time to time. In addition, the Employee Benefit Plan Board may make such amendments to the Plan as it deems necessary or desirable except those amendments which substantially increase the cost of the Plan to PP&L or a Participating Company or significantly alter the benefit design or eligibility requirements of the Plan. Each amendment to the Plan will be binding on each Participating Company. No termination or amendment shall (without Participant's consent) alter: a) Participant's right to payments of amounts previously credited to Participant's Account, which amounts shall continue to earn interest as provided for herein as though termination or amendment had not been effected, b) the amount or times of payment of such amounts which have commenced prior to the effective date of such termination or amendment, or c) the rights set forth in paragraph 5 to designate beneficiaries in the event of Participant's death or alter Participant's right to monthly supplemental payments under paragraph 7; provided, however, that no such consent may accelerate the Participant's payments. Notwithstanding the foregoing, if PP&L is liquidated, the EBPB shall have the right to determine the Total Amount Payable and any monthly supplemental payments payable under paragraph 7 to Participant, and to cause the amount so determined to be paid in one or more installments or upon such other terms and conditions and at such other time (not beyond the time provided for herein) as the EBPB determines to be just and equitable. Any determinations made pursuant to the preceding sentence shall be consistent as to all Participants. II. Except as provided for in this Amendment No. 1, all other provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment No. 1 is executed this _____ day of January, 1999. PP&L, INC. By:_______________________________ John M. Chappelear Chairman Employee Benefit Plan Board -5- EX-10.(N).1 15 PP&L INC. - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Exhibit 10(n)-1 PP&L, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Amended and Restated Effective as of January 1, 1998 PP&L, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998 TABLE OF CONTENTS -----------------
ARTICLE PAGE - --------- ---- 1. Purpose............................................. 2. Definitions......................................... 3. Entitlement to Benefits............................. 4. Amount of Supplemental Executive Retirement Benefit. 5. Time of Payment..................................... 6. Method of Payment................................... 7. Death Benefit....................................... 8. Administration...................................... 9. Miscellaneous ...................................... 10. Termination or Amendment............................ 11. Effective Date...................................... Appendix A..........................................
PP&L, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -------------------------------------- WHEREAS, PP&L, Inc. ("PP&L") adopted the PP&L, Inc. Supplemental Executive Retirement Plan (the "Plan"), effective July 1, 1985, as amended and restated from time to time, for certain of its employees; and WHEREAS, PP&L desires at this time to amend and restate the Plan; NOW, THEREFORE, effective as of January 1, 1998, the Plan is continued, amended and restated as hereinafter set forth: 1 . Purpose. The purpose of this Supplemental Executive Retirement Plan is to provide certain executive officers of PP&L additional retirement income so that total retirement income for key officers is competitive with other employers and in order to facilitate early retirement from key positions carrying the most important responsibilities. 2. Definitions. (a) "ACTUARIAL EQUIVALENT" means having or that which has equal actuarial value to the Supplemental Executive Retirement Benefit based on the (1) For purposes of the annuity forms of benefit described in Article 6, a Participant's SERB as calculated under Article 4 shall be converted to an optional annuity form of benefit by using the assumptions and factors described in Schedule A of the Retirement Plan. (2) For purposes of the single sum form of benefit described in Article 6, the Participant's SERB as calculated under Article 4, shall be converted to a single sum by using the following factors: (A) An interest rate equal to the immediate annuity rate that would be used by the Pension Benefit Guaranty Corporation for purposes of determining a lump sum distribution upon plan termination, as in effect for the month in which the Participant's benefit commencement date occurs. (B) A mortality rate based on the 1983 GAM Unisex Table. (b) "Affiliated Company" or "Affiliated Companies" shall mean any parent or subsidiaries of PP&L (or companies under common control with PP&L) which are members of the same controlled group of corporations (within the meaning of section 1563(a) of the Code) as PP&L. (c) "Board" means the Board of Directors of PP&L, Inc. (d) "Cause" for Participant's Termination of Employment by PP&L means: (1) and continued failure by Participant to substantially perform Participant's duties with PP&L or an Affiliated Company (other than any such failure resulting from Participant's incapacity due to physical or mental illness or, if applicable, any such actual or anticipated failure after the issuance of any "Notice of Termination for Good Reason" by the Participant pursuant to any severance agreement between Participant and PP&L or an Affiliated Company) after a written demand for substantial performance is delivered to Participant by the Board, which demand specifically identifies the manner in which the Board believes that Participant has not substantially performed Participant's duties, or (2) the willful engaging by Participant in conduct which is demonstrably and materially injurious to PP&L or an Affiliated Company, monetarily or otherwise. (3) For purposes of Subsections (1) and (2) of this definition, (A) no act, or failure to act, on Participant's part shall be deemed "willful" unless done, or omitted to be done, by Participant not in good faith and without reasonable belief that Participant's act, or failure to act, was in the best interest of PP&L or the Affiliated Company, and (B) in the event of a dispute concerning the application of this provision, no claim by PP&L or an Affiliated Company that Cause exists shall be given effect unless PP&L or the Affiliated Company establishes to the Board by clear and convincing evidence that Cause exists. (e) "CHANGE IN CONTROL" means the occurrence of any one of the following events: (1) any change in the control of Resources of a nature that would be required to be reported in response to Item 1(a) of Form 8-K under the Exchange Act; (2) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Resources and any new director (other than a director designated by a Person who has entered into an agreement with Resources to effect a transaction described in Paragraph (1), (3) or (4) of this definition) whose election by the Board of Directors of Resources or nomination for election by the shareowners of Resources was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute at least a majority thereof; (3) any Person becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Resources representing 20% or more of the combined voting power of Resources' then outstanding securities entitled to vote generally in the election of directors; (4) the approval by the shareowners of Resources of any merger or consolidation of Resources with any other corporation or a plan of complete liquidation of Resources or the sale or other disposition of all or substantially all of the assets of Resources to any other person or persons unless, after giving effect thereto, (A) holders of Resources' then outstanding securities entitled to vote generally in the election of directors will own a majority of the outstanding stock entitled to vote generally in the election of directors of the continuing, surviving or transferee corporation or any parent (within the meaning of Rule 12b-2 under the Exchange Act) thereof, and (B) the incumbent members of the Board of Directors of Resources as constituted immediately prior thereto shall constitute at least a majority of the directors of the continuing, surviving or transferee corporation and any parent thereof; or (5) the Board of Directors of Resources adopts a resolution to the effect that a "Change in Control" has occurred or is anticipated to occur. (f) "CHANGE IN CONTROL PARTICIPANT" means the following: (1) a Participant whose Termination of Employment occurs after a Change in Control and within 36 months after the month in which the Change in Control occurs, unless such Termination of Employment is (A) by PP&L or an Affiliated Company for Cause, (B) by reason of the Participant's death, Disability or Retirement, or (C) by the Participant without Good Reason, or (2) a Participant whose Termination of Employment occurs prior to a Change in Control (whether or not a Change in Control ever occurs) (A) at the request or direction of a Person who has entered into an agreement with Resources the consummation of which would constitute a Change in Control, or (B) at the Participant's initiative for Good Reason if the circumstance or event which constitutes Good Reason occurs at the direction of such Person or (C) the Participant's Termination of Employment is by PP&L or an Affiliated Company without Cause or is by the Participant for Good Reason, and such Termination of Employment or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Participant shall be presumed to be correct unless PP&L establishes to the Board by clear and convincing evidence that such position is not correct. (g) "DISABILITY" shall be deemed the reason for a Participant's Termination of Employment by PP&L or an Affiliated Company, if, (1) as a result of the Participant's incapacity due to physical or mental illness, the Participant shall have been absent from the full-time performance of the Participant's duties with PP&L and all Affiliated Companies for a period of six consecutive months, and (2), if applicable, PP&L shall have given the Participant any "Notice of Termination for Disability" required by any severance agreement between the Participant and PP&L or an Affiliated Company, and, within thirty days after such "Notice of Termination," if any, is given, the Participant shall not have returned to the full-time performance of the Participant's duties. (h) "DISPLACED PARTICIPANT" means a Participant who has a Termination of Employment after completing one or more Years of Vesting Service, and who qualifies for benefits pursuant to PP&L's Displaced Managers Policy (SPM 606). (i) "EARLY RETIREMENT REDUCTION FACTOR" means the percentage that appears adjacent to the Participant's age below determined under the appropriate column. (1) Column (1) shall apply to any Retiree. (2) Column (2) shall apply to any Terminated Vested Participant. (3) Column (3) shall apply to any Change in Control Participant. Notwithstanding anything in this Section to the contrary, a Participant who meets the definition of a Retiree, a Terminated Vested Participant and/or a Displaced Participant, who also meets the definition of a Change in Control Participant, shall be treated as a Change in Control Participant for purposes of this Section. (4) Column (4) shall apply to any Displaced Participant. Notwithstanding Subsection (1) or (2), a Participant who meets the definition of a Retiree or a Terminated Vested Participant, but not the definition of a Change in Control Participant, who also meets the definition of a Displaced Participant, shall be treated as a Displaced Participant for purposes of this Section. Percentage of Benefit Received ------------------------------
(1) (2) (3) (4) Age When Change in Benefits Terminated Control Displaced Start Retiree Vested Participant Participant - ---------------------- ------- ---------- --- ----------- 60 100 100 100 100 59 95 90 95 100 58 90 80 90 100 57 85 70 85 100 56 80 60 80 100 55 75 50 75 100 54 70 N/A 70 100 53 65 N/A 65 100 52 60 N/A 60 100 51 55 N/A 55 100 50 50 N/A 50 100 49 or younger N/A N/A N/A N/A
(j) "EBPB" means the Employee Benefit Plan Board, the members of which are appointed by the Board. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time. (I) "Good Reason" for Termination of Employment by a Participant means the occurrence (without the Participant's express written consent) after a Change in Control, or prior to a Change in Control under the circumstances described in paragraphs (B) and (C) of Section (2) of the definition of "Change in Control Participant" (treating all references in paragraphs (1) through (7) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by PP&L or an Affiliated Company, or failures by PP&L or an Affiliated Company to act: (1) the assignment to the Participant of any duties inconsistent with the Participant's status as an executive officer or key employee of PP&L or a substantial adverse alteration in the nature or status of the Participant's responsibilities from those in effect immediately prior to a Change in Control; (2) a reduction by PP&L or an Affiliated Company of the Participant's annual base salary as in effect on the effective date of this amended and restated Plan, or as the same may be increased from time to time, except for across-the-board decreases uniformly affecting management, key employees and salaried employees of PP&L or the Affiliated Company, or the business unit in which Participant is then employed, (3) the relocation of the Participant's principal work location to a location more than 30 miles from the vicinity of such work location immediately prior to a Change in Control or PP&L's or an Affiliated Company's requiring the Participant to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on PP&L's or an Affiliated Company's business to an extent substantially consistent with the Participant's present business travel obligations; (4) the failure by PP&L or an Affiliated Company to pay to the Participant any portion of the Participant's current compensation or to pay to the Participant any portion of an installment of deferred compensation under any deferred compensation program of PP&L or an Affiliated Company, within seven days of the date such compensation is due, except for across-the-board compensation deferrals uniformly affecting management, key employees and salaried employees of PP&L or the Affiliated Company, or the business unit in which Participant is then employed; (5) the failure by PP&L or an Affiliated Company to continue in effect any compensation or benefit plan in which the Participant participates immediately prior to a Change in Control which is material to the Participant's total compensation, or any substitute plans adopted prior to a Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by PP&L or an Affiliated Company to continue the Participant's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Participant's participation relative to other participants, as existed immediately prior to the Change in Control, or (6) the failure by PP&L or an Affiliated Company to continue to provide the Participant with benefits substantially similar to those enjoyed by the Participant under any of PP&L's pension, savings, life insurance, medical, health and accident, or disability plans in which the Participant was participating immediately prior to a Change in Control, except for across-the- board changes to any such plans uniformly affecting all participants in such plans, the taking of any other action by PP&L or an Affiliated Company which would directly or indirectly materially reduce any of such benefits or deprive the Participant of any material fringe benefit enjoyed by the Participant at the time of the Change in Control, or the failure by PP&L or an Affiliated Company to provide the Participant with the number of paid vacation days to which the Participant is entitled on the basis of years of service with PP&L or an Affiliated Company in accordance with PP&L's normal vacation policy at the time of the Change in Control; or (7) any purported termination of the Participant's employment which is not effected pursuant to any "Notice of Termination" required by any severance agreement between the Participant and PP&L or an Affiliated Company. The Participant's right to terminate his or her employment with PP&L for Good Reason shall not be affected by the Participant's incapacity due to physical or mental illness. The Participant's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Participant that Good Reason exists shall be presumed correct unless PP&L establishes to the Board by clear and convincing evidence that Good Reason does exist. (m) "OFFICERS DEFERRED COMPENSATION PLAN" means the PP&L Officers Deferred Compensation Plan, as amended from time to time. (n) "PARTICIPANT" means an eligible officer or former officer of PP&L entitled to receive benefits under Article 3 of this Plan. (o) "PERSON" shall have the meaning given in section 3(a)(9) of the Exchange Act, as modified and used in sections 13(d) and 14(d) thereof, however, a Person shall not include (1) Resources or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of Resources or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, or (4) a corporation owned, directly or indirectly, by the shareowners of Resources in substantially the same proportions as their ownership of stock of Resources. (p) "PLAN" means this Supplemental Executive Retirement Plan, as amended from time to time. (q) "POTENTIAL CHANGE IN CONTROL" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (1) Resources enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (2) any Person publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control; (3) any Person is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Resources representing 5% or more of the combined voting power of Resources' then outstanding securities entitled to vote generally in the election of directors; or (4) the Board of Resources adopts a resolution to the effect that, for purposes of this Plan, a Potential Change in Control has occurred. (r) "PP&L" means PP&L, Inc. (s) "Prior Plan" means any defined benefit plan, as defined in section 3(35) of the Employee Retirement Income Security Act of 1974, as amended, which at any time satisfies the applicable requirements of section 401 (a) of the Internal Revenue Code of 1986, as amended, provided that (1) such plan has a sponsor other than PP&L, and (2) Participant was a participant in such plan prior to employment with PP&L. (t) "Projected Years of Service" means the number of full or partial twelve-month periods beginning on the date on which Participant attains the age of 30 and ending on the date Participant ceases to be employed by PP&L. (u) "Resources" shall mean PP&L Resources, Inc. (v) "Retiree" means a Participant who has a Termination of Employment after: (1) attaining age 55 and completing at least 10 Years of Service, or (2) attaining age 60, or (3) attaining age 50, completing at least 10 Years of Service, and whom the Compensation and Corporate Governance Committee of the Board, in its sole discretion, determines is entitled to an immediately payable SERB. (w) "Retirement" shall be deemed the reason for a Participant's Termination of Employment if such employment is terminated in accordance with PP&L's retirement policy, including early retirement, generally appliG6619 to its salaried employees. (x) "Retirement Plan" means the PP&L Retirement Plan, as amended from time to time. (y) "SERB" means the Supplemental Executive Retirement Benefit payable under this Plan calculated under Article 4. (z) "Supplemental Final Average Earnings" means the following: (1) Supplemental Final Average Earnings means twelve times the average of a Participant's "compensation" as defined in Paragraphs (A) through (C) below, from PP&L and/or an Affiliated Company, for the 60 full consecutive months in the final 120 (or fewer) full consecutive months during which he is employed by PP&L and/or an Affiliated Company. For this purpose, non-consecutive months interrupted by periods in which the Participant receives no "compensation" shall be treated as consecutive. For purposes of this Section, "compensation" shall include the following: (A) the Participant's base salary from PP&L and/or any Affiliated Company prior to any deferrals to the Officers Deferred Compensation Plan or any other nonqualified deferred compensation plan of an Affiliated Company or any Internal Revenue Code section 401(k) plan by which Participant is covered, plus (B) the value of any cash grants attributable to any month used in the average, awarded to Participant pursuant to the executive incentive awards program initially approved by the Board on October 25, 1989 or any similar program maintained by an Affiliated Company, plus (C) with respect only to Participants who were officers in positions in PP&L Salary Groups I through IV on December 31, 1997, the value of any Restricted Stock (including any dividends distributed on Restricted Stock during the Restriction Period) granted to Participant under the Incentive Compensation Plan attributable to any month prior to the dates set forth in (1) and (11) below. (I) For purposes of the benefit formula in Subsection 4(b)(1), each month prior to January 1, 1998. (II) For purposes of the benefit formula in Subsection 4(b)(2), each month prior to January 1, 2002. (2) For the purposes of determining the Participant's "compensation" under Subsection (1) of this definition, the EBP13 will determine: (A) the value of any Restricted Stock under the Incentive Compensation Plan as of the Restricted Stock's Date of Grant (as defined by the Incentive Compensation Plan) and prorate such value over the year for which the Restricted Stock was granted; (B) the amount of any dividends distributed on Restricted Stock during the Restriction Period and prorate such amount over the period for which such dividends are paid; and (C) the amount of any cash grant awarded under the Participant incentive awards program and prorate such amount over the year for which the award was granted. (3) The Supplemental Final Average Earnings of a Displaced Participant who has less than 60 full consecutive months of employment shall be a reduced amount, equal to the difference of (A) minus (B), below. (A) (I) His total earnings as determined under Subsection (1) of this definition for his entire period of employment with PP&L and Affiliated Companies, divided by (II) the number of years the Participant was employed by PP&L and Affiliated Companies, including any fraction of a full year thereof, calculated by dividing the total number of full consecutive months of employment by 12. (B) (I) The amount determined in Paragraph (3)(A) immediately above, multiplied by (II) the Reduction Factor in Appendix A which corresponds with the Participant's total number of full consecutive months of employment with PP&L and Affiliated Companies. (aa) "Terminated Vested Participant" means a Participant: (1) who has a Termination of Employment after attaining age 50 but not age 55, and completing at least 10 Years of Service, and (2) whom the Board, in its sole discretion, does not determine is entitled to an immediately payable SERB. (bb) "Termination of Employment" means the Participant's termination of employment with PP&L and all Affiliated Companies. (cc) "Years of Service" means the number of full and partial years used to calculate Participant's accrued benefit under the Retirement Plan, but (1) excluding years prior to Participant's attainment of age 30, and (2) including service with any Affiliated Company prior to the Participant's becoming an officer of PP&L, provided such service would otherwise be counted under the Retirement Plan, but excluding any such service with an Affiliated Company performed before the Affiliated Company became an Affiliated Company. (dd) "Year(s) of Vesting Service" means the number of full years used to calculate Participant's vested interest in his accrued benefit under the Retirement Plan, but excluding any such service with an Affiliated Company performed before the Affiliated Company became an Affiliated Company. 3. ENTITLEMENT TO BENEFITS. (a) Any officer of PP&L who is in a position in PP&L Salary Group I through IV immediately prior to his Termination of Employment or the date of his transfer to an Affiliated Company shall be entitled to a SERB benefit if and only if he is either: (1) a Retiree, (2) a Terminated Vested Participant, (3) a Change in Control Participant, or (4) a Displaced Participant. (b) Notwithstanding Section 3(a), any officer of PP&L who is in a position in PP&L Salary Group I through IV immediately prior to his Termination of Employment or the date of his transfer to an Affiliated Company and who terminates employment with PP&L on account of his death shall be entitled to the death benefit in Article 7 in lieu of any other benefit under the Plan. (c) Notwithstanding Section 3(a) or (b), any Participant otherwise eligible for benefits shall forfeit any and all benefits under the Plan if such Participant's Termination of Employment is by PP&L or an Affiliated Company for Cause. (d) All officers who are eligible for benefits under Section 3(a) and who are entitled to annual benefits of at least $44,000 in the aggregate from all PP&L and Affiliated Company-sponsored pension, profit- sharing, savings or deferred compensation plans, shall terminate their employment with PP&L and all Affiliated Companies no later than the first day of the month following attainment of age 65, unless PP&L or Affiliated Company requests that employment be extended for up to one year. In such event, Participant must retire at the end of the extension, unless PP&L or Affiliated Company requests additional extensions, at the end of which Participant must retire. Any Participant requested to serve beyond the mandatory retirement date may decline to do so without affecting his benefit status under this Plan or any other PP&L or Affiliated Company benefit program. Failure to accept benefits provided for in this Plan shall not affect the requirements of this paragraph. 4. AMOUNT OF SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFIT. (a) A Participant entitled to benefits under Article 3 will be paid a SERB equal to an annual amount payable for the life of Participant calculated pursuant to Sections (b) through (f) below: (b) The amount calculated under Subsection (1) and/or (2), as appropriate: (1) The sum of (A) plus (B)-. (A) 2.0% of Participant's Supplemental Final Average Earnings times his Years of Service up to 20, plus (B) 1.5% of Participant's Supplemental Final Average Earnings times his Years of Service in excess of 20 but not in excess of 30. (2) With respect only to Participants who were officers in positions in PP&L Salary Groups I through IV on December 31, 1997: (A) the benefit determined under Subsection (4)(b)(1) shall (1) be calculated using Projected Years of Service instead of Years of Service, and (11) be reduced by the annual amount payable to Participant from a Prior Plan; (B) such Participant's SERB shall not be less than the greater of (1) or (11) below: (I) (i) 2.7% of Participant's Supplemental Final Average Earnings calculated as of the earlier of December 31, 2001 or the date Participant terminates employment times his Years of Service up to 20, plus (ii) 1.0% of Participant's Supplemental Final Average Earnings calculated as of the earlier of December 31, 2001 or the date Participant terminates employment, times his Years of Service in excess of 20 but not more than 30 less (iii) the annual amount payable as the maximum primary Social Security benefit payable to an individual aged 65 in the year of Participant's retirement whether or not received by Participant. (II) (i) 2.7% of Participant's Supplemental Final Average Earnings calculated as of the earlier of December 31, 2001 or the date Participant terminates employment, times his Projected Years of Service up to 20, plus (ii) 1.0% of Participant's Supplemental Final Average Earnings calculated as of the earlier of December 31, 2001 or the date Participant terminates employment, times his Projected Years of Service in excess of 20 but not more than 30, less (iii) the annual amount payable to Participant from a Prior Plan, less (iv) the annual amount payable as the maximum primary Social Security benefit payable to an individual aged 65 in the year of Participant's retirement whether or not received by Participant (c) The amount calculated under Section (b) shall be multiplied by the applicable Early Retirement Reduction Factor, (d) With respect to all Participants, the amount calculated under Sections (b) and (c) shall be reduced by the following amounts, to the extent such amounts are accrued during periods for which the Participant is credited with Years of Service or Projected Years of Service under this Plan: (1) The Participant's vested accrued benefit under the Retirement Plan (but not including any temporary supplemental amounts payable under Section 5.3(b) of the Retirement Plan), (A) expressed as a single life annuity, and (B) expressed as a benefit payable at the same time as Participant's SERB, except that in the event Participant commences benefits under this Plan prior to commencing benefits under the Retirement Plan, the reduction will be made as if Participant had commenced benefits under the Retirement Plan at the later of age 55 or commencement of benefits under this Plan, based on the ea0y retirement factors, and interest and mortality assumptions used in the Retirement Plan. The amount of the reduction will not thereafter be changed upon Participant's actual commencement of benefits under the Retirement Plan. For purposes of this Subsection (d)(1), the term "Retirement Plan" shall include any successor plan. (2) Supplemental payments to Participant under section 7(a) of the Officers Deferred Compensation Plan as if Participant had chosen a single life annuity under such Plan payable at the same time as Participant's SERB. (3) The Participant's vested accrued benefit under any other nonqualified defined benefit plan maintained by PP&L, expressed as a single life annuity payable at the same time as Participant's SERB, based on the early retirement factors and interest and mortality rates used in such plan. (e) With respect to those Participants who have service with an Affiliated Company, (1) The amount calculated under Sections (b), (c) and (d) shall be reduced by the following: (A) The participant's vested accrued benefit under the Pension Plan for Employees of Penn Fuel Gas, Inc. and North Penn Gas Company, and/or the Pennsylvania Mines Corporation Retirement Plan, determined as follows: (I) to the extent accrued during periods for which the Participant is credited with Years of Service or Projected Years of Service under this Plan, and (II) expressed as a single life annuity, and (III) expressed as a benefit payable at the same time as Participant's SERB, except that in the event Participant commences benefits under this Plan prior to commencing benefits under such other plan, the reduction will be made as if Participant had commenced benefits under such other plan at the later of such plan's earliest retirement age or commencement of benefits under this Plan. The amount of the reduction will not thereafter be changed upon Participant's actual commencement of benefits under such plan, and (IV) based on the early retirement factors and interest and mortality rates used in such other plan. (B) The Participant's vested account under the PP&L Resources Subsidiary Savings Plan and the H.T. Lyons, Inc. 401(k) Plan, and their successors, determined as follows: (I) based on contributions other than the Participant's own elective deferrals or employee contributions and earnings thereon. (II) to the extent attributable to contributions made during periods for which these Participant is credited with Years of Service or Projected Years of Service under this Plan, (III) such account valued as of the date Participant's SERB benefit commences to be paid, but including any amounts distributed to or on behalf of Participant, (IV) such account converted to a benefit expressed as a single life annuity for Participant's lifetime, commencing at the same time as Participant's SERB, based on the 30-year U.S. Treasury bond rate as of the month preceding the month SERB payments commence, and the 1983 Group Annuity Mortality Table (unisex): (C) The Participant's employer-derived benefit under any taxqualified plan not listed in Paragraph (A) or (B) of this Subsection 5(e)(1) of an Affiliated Company who becomes an Affiliated Company after the effective date of this amended and restated Plan, to the extent that such plan is the primary tax-qualified retirement plan of such Affiliated Company, and such benefit is based on service counted under this Plan. If such plan is a defined benefit plan, the offset shall be calculated in a manner similar to that described in Paragraph (A) of this Subsection 5(e)(1). If such plan is a defined contribution plan, the offset shall be calculated in a manner similar to that described in Paragraph (B) of this Subsection 5(e)(1). (D) The Participant's vested accrued benefit under any nonqualified defined benefit plan maintained by an Affiliated Company that was accrued prior to becoming an employee of PP&L, expressed as a single life annuity payable at the same time as Participant's SERB. (2) The best data available will be used to determine the amounts to be offset under this Section (e). The EBPB has the absolute, discretionary power to make reasonable approximations and estimates to determine the value and amount of such offset amounts, applied uniformly to all similarly situated Participants.. If reasonable approximations and estimates of such amounts are necessary, the EBPB will so inform the Participant. A Participant may elect to have his SERB calculated without regard to the offsets described in this Section (e) with respect to contributions made to such plans and/or benefits accrued under such plans prior to the date the Participant first becomes employed by PP&L, in which case his Years of Service and Projected Years of Service shall not include service before the date the Participant W becomes employed by PP&L. (3) The amount calculated under Section (b) of this Article with respect to a Participant who has ceased to be an officer of PP&L by reason of a transfer to an Affiliated Company shall be calculated on the basis of his Years of Service and/or Projected Years of Service as of the date of his transfer, and on the basis of his Supplemental Final Average Earnings and his Years of Vesting Service as of the date of his Termination of Employment. (f) In the event that a Participant's benefits under any plan to which Section (d) or (e) of this Article refers or under a Prior Plan are subject in whole or in part to a domestic relations order, SERB payments shall be calculated and paid without regard to such order. 5. TIME OF PAYMENT. A Participant who is eligible for benefits under Article 3 shall start receiving SERB payments on the date set forth below. (a) A Retiree shall receive benefits as soon as administratively practicable following his Termination of Employment. (b) A Terminated Vested Participant shall receive benefits as follows: (1) If he has elected a single sum form of benefit under Article 6, such single sum shall be paid as soon as administratively practicable following his Termination of Employment. (2) If he has elected an annuity form of benefit under Article 6, such annuity form shall start to be paid as soon as administratively practicable following his attainment of age 55; provided that if he also meets the definition of a Change in Control Participant or a Displaced Participant, such annuity form shall start to be paid as soon as administratively practicable following the later of age 50 or his Termination of Employment. (c) A Change in Control Participant or a Displaced Participant shall receive benefits as follows: (1) If he has elected a single sum form of benefit under Article 6, such single sum shall be paid as soon as administratively practicable following his Termination of Employment (2) If he has elected an annuity form of benefit under Article 6, such annuity form shall start to be paid as soon as adminisbvffive4y practicable following the later of his attainment of age 50 or his Termination of Employment. (d) In the event that Resources disputes to its shareowners as a dividend a sufficient number of shares of PP&L or an Affiliated Company, on a pro rata basis, in accordance with their Resources equity ownership, or in the event of the sale of up to 25% of the securities of PP&L or an Affiliated Company in an initial public offering of securities registered under the Securities Act of 1933, such distribution or sale of shares resulting in a Spin-Off Company (the "Spun-Off Company"), with the effect that the Spun-Off Company no longer meets the definition of PP&L or an Affiliated Company, and in connection with such distribution or sale, a Participant becomes an employee of the Spun-Off Company, the payment of any SERB to which Participant (or his beneficiary) is entitled under the Plan shall be made or shall commence to be made no earlier than at such time as the Participant (or his beneficiary) is eligible to commence to receive to a distribution (either immediate or deferred) under the Retirement Plan or any successor plan. 6. METHOD OF PAYMENT. (a) A Participant who is eligible to receive benefits under the Retirement Plan and who elects to receive such benefits at the time SERB payments begin may elect to have his SERB paid in one of the following forms of benefit, each of which shall be the Actuarial Equivalent of his SERB benefit: (1) the form of annuity payment in which his Retirement Plan benefits are to be paid, (provided, however, if any monthly payment would be 100 dollars or less, the EBPB, in its discretion, may elect to make such payments in such installments as the EBPB may determine or in a single sum payment), or (2) a single sum (b) A Participant who is not eligible to receive benefits under the Retirement Plan or who has elected not to receive such benefits under the Retirement Plan at the time SERB payments begin, may elect one of the following forms of benefit, which shall be the Actuarial Equivalent of his SERB benefit, provided, however, that if he elects an annuity form under Paragraph (1), (2) or (3) below, and if any monthly payment would be 100 dollars or less, the EBPB, in its discretion, may elect to make such payments in such installments as the EBPB may determine, or in a single sum payment: (1) a single life annuity with equal monthly installments payable to the Participant for his lifetime; or (2) a joint and survivor annuity with the Participant's designated beneficiary, payable in monthly installments to the Participant for his lifetime and with a specified percentage of the amount of such monthly installment payable after the death of the Participant to the designated beneficiary of such Participant, if then living, for the life of such designated beneficiary; or (3) a single life annuity payable in equal monthly installments to the Participant for his lifetime, with 60, 120 or 180 monthly payments guaranteed, or (4) a single sum. (c) A Participant may elect a form of benefit hereunder by filing written notice with the EBPB at anytime at least 12 months prior to the first day of the calendar month for which a SERB is first payable to Participant. If a Participant described in Section (a) of this Article fails to elect a form of benefit within the prescribed time period, the benefit shall be paid in the form in which such Participant's Retirement Plan benefits are paid. If a Participant described in Section (b) of this Article fails to elect a form of benefit within this time period, the benefit shall be paid in the form of a single- life annuity if the Participant does not have a spouse on the date of benefit commencement and in the form of a 50% joint and survivor annuity with Participant's spouse as the beneficiary if the Participant has a spouse on the date of benefit commencement. 7. Death Benefit. If a pre-retirement spouse's annuity is payable under the Retirement Plan on account of Participant's death, the Participant's surviving spouse will be paid a supplemental spouse's annuity based on the SERB and made in accordance with all the terms and conditions applicable to such preretirement spouse's annuities under the Retirement Plan. 8. ADMINISTRATION. The EBPB shall have the discretionary authority and final right to interpret, construe and make benefit determinations (including eligibility and amount) under the Plan. The decisions of the EBPB are final and conclusive for all purposes. If one or more members of the EBPB are disqualified by personal interest from taking part in a particular decision, the remaining member or members of the EBPB (although less than a quorum) shall have full authority to act on the matter. 9. MISCELLANEOUS. (a) If any person to receive payment is a minor, or is deemed by the EBPB or is adjudged to be legally incompetent, the payments shall be made to the duly appointed guardian or committee of such minor or incompetent, or they may be made to such person or persons who the EBPB believes are caring for or supporting such minor or incompetent. (b) All payments to persons entitled to benefits under this Plan shall be made to such persons and shall not be grantable, transferable or otherwise assignable in anticipation of payment thereof, in whole or in part, by the voluntary or involuntary acts of any such persons, or by operation of law, and shall not be liable or taken for any obligation of such person. PP&L will observe the terms of the Plan unless and until ordered to do otherwise by a state or Federal court. As a condition of participation, Participant agrees to hold PP&L harmless from any claim that arises out of PP&L's obeying any such order whether such order effects a judgment of such court or is issued to enforce a judgment or order of another court. (c) Nothing in this Plan shall confer any right on any Participant to continue in PP&L's employ or to receive compensation, nor shall anything in this Plan affect in any way the right of PP&L to terminate any Participant's employment at any time. (d) The expenses of administration hereunder shall be borne by PP&L. (e) This Plan shall be construed, administered and enforced according to the laws of the Commonwealth of Pennsylvania. (f) All payments from this Plan shall be made from the general assets of PP&L. This Plan shall not require PP&L to set aside, segregate, earmark, pay into trust or special account or otherwise restrict the use of its assets in the operation of the business. Participant shall have no greater right or status than as an unsecured creditor of PP&L with respect to any amounts owed to Participant hereunder. (g) The masculine pronoun shall be deemed to include the feminine and the singular to include the plural unless a different meaning is plainly required by the context. 10. TERMINATION OR AMENDMENT. The Board may, in its sole discretion, terminate and amend this Plan from time to time provided, however, that the Plan may not be terminated or amended to the prejudice or detriment of any Participant during the three (3) year period immediately following a Change in Control (or, if later, thirty six (36) months from the consummation of the transaction giving rise to the Change in Control). Without limiting the generality of the foregoing, the proviso of the preceding sentence shall not, at any time or in any event, be amended or deleted. Subject to the foregoing, the EBPB may make such amendments to the Plan as it deems necessary or desirable except those amendments which substantially increase the cost of the Plan to PP&L or significantly alter the benefit design or eligibility requirements of the Plan. No termination or amendment shall (without Participant's consent) alter Participant's right to monthly payments which have commenced prior to the effective date of such termination or amendment. Prior to a Change in Control, the Board specifically reserves the right to terminate or amend this Plan to eliminate the right of any Participant to receive payment hereunder prior to the time when payments are in pay status under this Plan. Notwithstanding the foregoing, if PP&L is liquidated, the EBPB shall cause the amounts due hereunder to be paid in one or more installments or upon such other terms and conditions and at such other time as the EBPB determines to be just and equitable, but in no event later than the time such amounts would otherwise have been paid. 11. Effective Date. The original effective date of this Plan is July 1, 1985. The effective date of this amended and restated Plan is January 1, 1998. Executed this ____ day of July, 1998. PP&L, INC. By: ----------------------- John M. Chappelear Vice President-Investments Pensions
APPENDIX A # of Full Consecutive # of Full Consecutive Months of Employment Reduction Factor (%) Months of Employment Reduction Factor 60 0.0000 36 15.0000 59 0.4167 35 16.2500 58 0.8333 34 17.5000 57 1.2500 33 18.7500 56 1.6667 32 20.0000 55 2.0833 31 21.2500 54 2.5000 30 22.5000 53 2.9167 29 23.7500 52 3.3333 28 25.0000 51 3.7500 27 26.2500 50 4.1667 26 27.5000 49 4.5833 25 28.7500 48 5.0000 24 30.0000 47 5.8333 23 31.6667 46 6.6667 22 33.3333 45 7.5000 21 35.0000 44 8.3333 20 36.6667 43 9.1667 19 38.3333 42 10.0000 18 40.0000 41 10.8333 17 41.6667 40 11.6667 16 43.3333 39 12.5000 15 45.0000 38 13.3333 14 46.6667 37 14.1667 13 48.3333
EX-10.(N).2 16 AMENDMENT NO. 1 TO PP&L INC. Exhibit 10(n)-2 AMENDMENT NO. 1 TO PP&L, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN WHEREAS, PP&L, Inc. ("PP&L") adopted the PP&L, Inc. Supplemental Executive Retirement Plan (the "Plan"), effective July 1, 1985, as amended and restated from time to time, for certain of its employees; and WHEREAS, the Plan was amended and restated effective January 1, 1998; and WHEREAS, the Company desires to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective September 14, 1998 the following sections of Articles 1, 2, 3, 4, 9 and 10 are amended to read: 1. PURPOSE. The purpose of this Supplemental Executive Retirement Plan is to provide certain executive officers of PP&L and Participating Companies with additional retirement income so that total retirement income for key officers is competitive with other employers and in order to facilitate early retirement from key positions carrying the most important responsibilities. 2. DEFINITIONS. (a) "ACTUARIAL EQUIVALENT" means having or that which has equal actuarial value to the SERB based on the following. (d) "CAUSE" for Participant's Termination of Employment by PP&L or an Affiliated Company means (f) "CHANGE IN CONTROL PARTICIPANT" means the following: (1) a Participant whose Termination of Employment occurs after a Change in Control and within 36 months after the month in which the Change in Control occurs, unless such Termination of Employment is (A) by PP&L or an Affiliated Company for Cause, (B) by reason of the Participant's death, Disability or Retirement, or (C) by the Participant without Good Reason, or -1- (2) a Participant whose Termination of Employment occurs prior to a Change in Control (whether or not a Change in Control ever occurs) (A) at the request or direction of a Person who has entered into an agreement with Resources the consummation of which would constitute a Change in Control, or (B) at the Participant's initiative for Good Reason if the circumstance or event which constitutes Good Reason occurs at the direction of such Person or (C) the Participant's Termination of Employment is by PP&L or an Affiliated Company without Cause or is by the Participant for Good Reason, and such Termination of Employment or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Participant shall be presumed to be correct unless PP&L or an Affiliated Company establishes to the Board by clear and convincing evidence that such position is not correct. (g) "DISABILITY" shall be deemed the reason for a Participant's Termination of Employment by PP&L or an Affiliated Company, if, (1) as a result of the Participant's incapacity due to physical or mental illness, the Participant shall have been absent from the full-time performance of the Participant's duties with PP&L and all Affiliated Companies for a period of six consecutive months, and (2), if applicable, PP&L or an Affiliated Company shall have given the Participant any "Notice of Termination for Disability" required by any severance agreement between the Participant and PP&L or an Affiliated Company, and, within thirty days after such "Notice of Termination," if any, is given, the Participant shall not have returned to the full- time performance of the Participant's duties. (h) "DISPLACED PARTICIPANT" means a Participant who has a Termination of Employment after completing one or more Years of Vesting Service, and who qualifies for benefits pursuant to PP&L's Displaced Managers Policy (SPM 606) and who executes a severance agreement and release as specified by the Participating Company. (l) "GOOD REASON" for Termination of Employment by a Participant means the occurrence (without the Participant's express written consent) after a Change in Control, or prior to a Change in Control under the circumstances described in paragraphs (B) and (C) of Section (2) of the definition of "Change in Control Participant" (treating all references in paragraphs (1) through (7) below to a "Change in Control" as references to a "Potential Change in -2- Control"), of any one of the following acts by PP&L or an Affiliated Company, or failures by PP&L or an Affiliated Company to act: (1) the assignment to the Participant of any duties inconsistent with the Participant's status as an executive officer or key employee of PP&L or an Affiliated Company or a substantial adverse alteration in the nature or status of the Participant's responsibilities from those in effect immediately prior to a Change in Control; (2) a reduction by PP&L or an Affiliated Company of the Participant's annual base salary as in effect on the effective date of this amended and restated Plan, or as the same may be increased from time to time, except for across-the-board decreases uniformly affecting management, key employees and salaried employees of PP&L or the Affiliated Company, or the business unit in which Participant is then employed; (3) the relocation of the Participant's principal work location to a location more than 30 miles from the vicinity of such work location immediately prior to a Change in Control or PP&L's or an Affiliated Company's requiring the Participant to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on PP&L's or an Affiliated Company's business to an extent substantially consistent with the Participant's present business travel obligations; (4) the failure by PP&L or an Affiliated Company to pay to the Participant any portion of the Participant's current compensation or to pay to the Participant any portion of an installment of deferred compensation under any deferred compensation program of PP&L or an Affiliated Company, within seven days of the date such compensation is due, except for across-the-board compensation deferrals uniformly affecting management, key employees and salaried employees of PP&L or the Affiliated Company, or the business unit in which Participant is then employed; (5) the failure by PP&L or an Affiliated Company to continue in effect any compensation or benefit plan in which the Participant participates immediately prior to a Change in Control which is material to the Participant's total compensation, or any substitute plans adopted prior to a Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by PP&L -3- or an Affiliated Company to continue the Participant's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Participant's participation relative to other participants, as existed immediately prior to the Change in Control, or (6) the failure by PP&L or an Affiliated Company to continue to provide the Participant with benefits substantially similar to those enjoyed by the Participant under any of PP&L's or an Affiliated Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Participant was participating immediately prior to a Change in Control, except for across-the-board changes to any such plans uniformly affecting all participants in such plans, the taking of any other action by PP&L or an Affiliated Company which would directly or indirectly materially reduce any of such benefits or deprive the Participant of any material fringe benefit enjoyed by the Participant at the time of the Change in Control, or the failure by PP&L or an Affiliated Company to provide the Participant with the number of paid vacation days to which the Participant is entitled on the basis of years of service with PP&L or an Affiliated Company in accordance with PP&L's or an Affiliated Company's normal vacation policy at the time of the Change in Control; or (7) any purported termination of the Participant's employment which is not effected pursuant to any "Notice of Termination" required by any severance agreement between the Participant and PP&L or an Affiliated Company. The Participant's right to terminate his or her employment with PP&L or an Affiliated Company for Good Reason shall not be affected by the Participant's incapacity due to physical or mental illness. The Participant's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Participant that Good Reason exists shall be presumed correct unless PP&L or an Affiliated Company establishes to the Board by clear and convincing evidence that Good Reason does exist. -4- (n) "PARTICIPANT" means an eligible officer or former officer of a Participating Company entitled to receive benefits under Article 3 of this Plan. (O) "PARTICIPATING COMPANY" means PP&L, PP&L EnergyPlus Co., and each other Affiliated Company that is designated by the Board to adopt this Plan by action of its board of directors. (t) "PRIOR PLAN" means any defined benefit plan, as defined in section 3(35) of the Employee Retirement Income Security Act of 1974, as amended, which at any time satisfies the applicable requirements of section 401(a) of the Internal Revenue Code of 1986, as amended, provided that (1) such plan has a sponsor other than a Participating Company, and (2) Participant was a participant in such plan prior to employment with a Participating Company. (u) "PROJECTED YEARS OF SERVICE" means the number of full or partial twelve-month periods beginning on the date on which Participant attains the age of 30 and ending on the date Participant ceases to be employed by a Participating Company. (x) "RETIREMENT" shall be deemed the reason for a Participant's Termination of Employment if such employment is terminated in accordance with PP&L's or an Affiliated Company's retirement policy, including early retirement, generally applicable to its salaried employees. (dd) "YEARS OF SERVICE" means the number of full and partial years used to calculate Participant's accrued benefit under the Retirement Plan, but (1) excluding years prior to Participant's attainment of age 30, and (2) including service with any Affiliated Company prior to the Participant's becoming an officer of a Participating Company eligible under this Plan, provided such service would otherwise be counted under the Retirement Plan, but excluding any such service with an Affiliated Company performed before the Affiliated Company became an Affiliated Company. 3. ENTITLEMENT TO BENEFITS. (a) Any officer of PP&L who is in a position in PP&L Salary Group I through IV immediately prior to his Termination of Employment or the date of his transfer to an Affiliated Company and any officer of a Participating Company who is designated as eligible in a resolution adopted by the board of directors of such Participating Company and remains such until his Termination of Employment or the date of his transfer to an Affiliated Company shall be entitled to a SERB benefit if and only if he is either: -5- (1) a Retiree, (2) a Terminated Vested Participant, (3) a Change in Control Participant, or (4) a Displaced Participant. (b) Notwithstanding Section 3(a), any officer of PP&L who is in a position in PP&L Salary Group I through IV immediately prior to his Termination of Employment or the date of his transfer to an Affiliated Company and any officer of a Participating Company who is designated as eligible in a resolution adopted by the board of directors of such Participating Company and remains such until his Termination of Employment or the date of his transfer to an Affiliated Company and who terminates employment with a Participating Company on account of his death shall be entitled to the death benefit in Article 7 in lieu of any other benefit under the Plan. (c) Notwithstanding Section 3(a) or (b), any Participant otherwise eligible for benefits shall forfeit any and all benefits under the Plan if such Participant's Termination of Employment is by PP&L or an Affiliated Company for Cause. (d) All officers who are eligible for benefits under Section 3(a) and who are entitled to annual benefits of at least $44,000 in the aggregate from all PP&L and Affiliated Company-sponsored pension, profit- sharing, savings or deferred compensation plans, shall terminate their employment with PP&L and all Affiliated Companies no later than the first day of the month following attainment of age 65, unless PP&L or Affiliated Company requests that employment be extended for up to one year. In such event, Participant must retire at the end of the extension, unless PP&L or Affiliated Company requests additional extensions, at the end of which period Participant must retire. Any Participant requested to serve beyond the mandatory retirement date may decline to do so without affecting his benefit status under this Plan or any other PP&L or Affiliated Company benefit program. Failure to accept benefits provided for in this Plan shall not affect the requirements of this paragraph. 4. AMOUNT OF SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFIT. (e) With respect to those Participants who have service with an Affiliated Company, -6- (1) The amount calculated under Sections (b), (c) and (d) shall be reduced by the following: (A) The participant's vested accrued benefit under the Pension Plan for Employees of Penn Fuel Gas, Inc. and North Penn Gas Company, and/or the Pennsylvania Mines Corporation Retirement Plan, determined as follows: (I) to the extent accrued during periods for which the Participant is credited with Years of Service or Projected Years of Service under this Plan, and (II) expressed as a single life annuity, and (III) expressed as a benefit payable at the same time as Participant's SERB, except that in the event Participant commences benefits under this Plan prior to commencing benefits under such other plan, the reduction will be made as if Participant had commenced benefits under such other plan at the later of such plan's earliest retirement age or commencement of benefits under this Plan. The amount of the reduction will not thereafter be changed upon Participant's actual commencement of benefits under such plan, and (IV) based on the early retirement factors and interest and mortality rates used in such other plan. (B) The Participant's vested account under the PP&L Resources Subsidiary Savings Plan and the H.T. Lyons, Inc. 401(k) Plan, and their successors, determined as follows: (I) based on contributions other than the Participant's own elective deferrals or employee contributions and earnings thereon. (II) to the extent attributable to contributions made during periods for which these Participant is credited with Years of Service or Projected Years of Service under this Plan, -7- (III) such account valued as of the date Participant's SERB benefit commences to be paid, but including any amounts distributed to or on behalf of Participant, (IV) such account converted to a benefit expressed as a single life annuity for Participant's lifetime, commencing at the same time as Participant's SERB, based on the 30-year U.S. Treasury bond rate as of the month preceding the month SERB payments commence, and the 1983 Group Annuity Mortality Table (unisex): (C) The Participant's employer-derived benefit under any tax- qualified plan not listed in Paragraph (A) or (B) of this Subsection 5(e)(1) of an Affiliated Company who becomes an Affiliated Company after the effective date of this amended and restated Plan, to the extent that such plan is the primary tax-qualified retirement plan of such Affiliated Company, and such benefit is based on service counted under this Plan. If such plan is a defined benefit plan, the offset shall be calculated in a manner similar to that described in Paragraph (A) of this Subsection 5(e)(1). If such plan is a defined contribution plan, the offset shall be calculated in a manner similar to that described in Paragraph (B) of this Subsection 5(e)(1). (D) The Participant's vested accrued benefit under any nonqualified defined benefit plan maintained by an Affiliated Company that was accrued prior to becoming an employee of a Participating Company, expressed as a single life annuity payable at the same time as Participant's SERB. (2) The best data available will be used to determine the amounts to be offset under this Section (e). The EBPB has the absolute, discretionary power to make reasonable approximations and estimates to determine the value and amount of such offset amounts, applied uniformly to all similarly situated Participants. If reasonable approximations and estimates of such amounts are necessary, the EBPB will so inform the Participant. A Participant may elect to have his SERB calculated without regard to the offsets described in this Section (e) with respect to contributions made to such plans and/or benefits accrued under such plans prior to the -8- date the Participant first becomes employed by a Participating Company, in which case his Years of Service and Projected Years of Service shall not include service before the date the Participant first becomes employed by a Participating Company. (3) The amount calculated under Section (b) of this Article with respect to a Participant who has ceased to be an officer of a Participating Company eligible under the Plan by reason of a transfer to an Affiliated Company that is not a Participating Company shall be calculated on the basis of his Years of Service and/or Projected Years of Service as of the date of his transfer, and on the basis of his Supplemental Final Average Earnings and his Years of Vesting Service as of the date of his Termination of Employment. 9. MISCELLANEOUS. (c) Nothing in this Plan shall confer any right on any Participant to continue in a Participating Company's employ or to receive compensation, nor shall anything in this Plan affect in any way the right of a Participating Company to terminate any Participant's employment at any time. 10. TERMINATION OR AMENDMENT. The Board may, in its sole discretion, terminate and amend this Plan from time to time provided, however, that the Plan may not be terminated or amended to the prejudice or detriment of any Participant during the three (3) year period immediately following a Change in Control (or, if later, thirty six (36) months from the consummation of the transaction giving rise to the Change in Control). Without limiting the generality of the foregoing, the proviso of the preceding sentence shall not, at any time or in any event, be amended or deleted. Subject to the foregoing, the Employee Benefit Plan Board may make such amendments to the Plan as it deems necessary or desirable except those amendments which substantially increase the cost of the Plan to PP&L or a Participating Company or significantly alter the benefit design or eligibility requirements of the Plan. Each amendment to the Plan will be binding on each Participating Company. No termination or amendment shall (without Participant's consent) alter Participant's right to monthly payments which have commenced prior to the effective date of such termination or amendment. Prior to a Change in Control, the Board specifically reserves the right to terminate or amend this Plan to eliminate the right of any Participant to receive payment hereunder prior to the time when payments are in pay status under this Plan. Notwithstanding the foregoing, if PP&L is liquidated, the EBPB shall cause the amounts due hereunder to be paid in one or more installments or upon such other terms and conditions and at such other time as the EBPB determines to be just -9- and equitable, but in no event later than the time such amounts would otherwise have been paid. II. Except as provided for in this Amendment No. 1, all other provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment No. 1 is executed this ____ day of January, 1999. PP&L, INC. By: ------------------------------ John M. Chappelear Vice President-Investments & Pensions -10- EX-10.(Q) 17 TERRY H. HUNT EMPLOYMENT AGREEMENT Exhibit 10(q) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of October 1, 1998 --------- (the "Effective Time"), by and among PP&L, Inc., a Pennsylvania corporation (the -------------- "Company"), Terry H. Hunt (the "Executive") and, for purposes of Section 1(b) ------- --------- only, Penn Fuel Gas, Inc., a Pennsylvania corporation ("PFG"). --- W I T N E S S E T H: - - - - - - - - - - WHEREAS, on August 21, 1998, PP&L Resources, Inc. ("Resources"), a --------- Pennsylvania corporation and the parent corporation of the Company, acquired PFG and PFG has become a wholly-owned subsidiary of Resources; and WHEREAS, PFG and the Executive are parties to that certain Employment Agreement dated as of February 27, 1992 (the "1992 Employment Agreement"), and ------------------------- that certain Retention Agreement dated as of July 18, 1996 by and between PFG and the Executive (the "Retention Agreement"); and ------------------- WHEREAS, in recognition of the Executive's experience and his abilities, the Company desires to assure itself of the employment of the Executive from and after the Effective Time in accordance with the terms and conditions provided herein; and WHEREAS, the parties to the 1992 Employment Agreement and Retention Agreement wish to terminate such Agreements, effective as of the Effective Time; and WHEREAS, the Executive wishes to perform services for the Company in accordance with the terms and conditions provided herein. NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment. (a) The Company hereby agrees to employ the ---------- Executive, and the Executive hereby agrees to perform services for the Company, on the terms and conditions set forth herein. (b) At the Effective Time, the 1992 Employment Agreement and Retention Agreement shall terminate and shall be null and void and of no further force and effect. 2. Term. This Agreement is for the two-year period (the "Term") ---- ---- commencing as of the date of the Effective Time and terminating on the second anniversary of such date, or upon the Executive's earlier death, Disability (as defined in Section 7(b) hereof) or other termination of employment pursuant to Section 7 hereof. 3. Position. During the Term, the Executive shall serve as the -------- Senior Vice President - Strategic Planning, of the Company. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in carrying out his duties and obligations to the Company. The Executive shall report directly to the Chief Executive Officer of the Company. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the corporate headquarters of the Company located at Allentown, Pennsylvania, or at such other location within 65 straight-line miles of Villanova, Pennsylvania, except for required travel on the Company's business. The Executive acknowledges and agrees that a change in the headquarters of the Company within these geographic areas would not constitute "Good Reason," as such term is used in the Retention Agreement. 6. Compensation and Related Matters. -------------------------------- (a) Annual Base Salary. The Company shall pay to the Executive ------------------ an annual base salary (the "Base Salary") at a rate not less than $265,000, such ----------- salary to be paid in conformity with the payroll policies of the Company, relating to its senior officers. The Base Salary may, from time to time, be increased by the Board of Directors of the Company, consistent in timing and consideration with other senior officers of the Company. (b) Bonus and Incentive Plans. During the Term, the Executive ------------------------- shall be entitled to participate in incentive, bonus, stock option, restricted stock, phantom stock, stock purchase, deferred compensation, and other executive compensation plans, programs and arrangements (the "Incentive Plans") comparable --------------- to those that are available to senior vice presidents of the Company and shall be provided a level of benefits and bonus opportunities under the Incentive Plans comparable to the benefits and bonus opportunities provided to senior vice presidents of the Company; provided, however, that with respect to the 1998 -------- ------- calendar year, in lieu of any other amounts due to the Executive under this Section 6(b), if the Executive is employed by the Company as of December 31, 1998, he shall be entitled to receive an incentive compensation award in the amount equal to the 1998 Bonus Amount (as defined below), paid at such time as bonuses are paid generally to senior vice presidents of the Company, but in no event later than March 31, 1999. The determination of the level of any 2 compensation due to the Executive under the Incentive Plans after the 1998 calendar year shall be based solely upon the performance of the Company on a consolidated basis. Beginning in calendar year 1999, the Executive shall have bonus opportunities under the Incentive Plans up to 100% of his Base Salary, to be paid in such form as is the policy of the Company from time to time (currently up to 40% in cash, up to 30% in restricted stock, and up to 30% in stock options assuming such stock options are approved by the shareowners of Resources at its 1999 annual meeting of shareowners). As used herein, the 1998 Bonus Amount shall equal the average of the bonus payouts (as a percentage of base salary) to the senior vice presidents of the Company of cash, restricted stock and stock options in respect of their 1998 performances, but using Executive's Base Salary as the multiplier, and then prorated to reflect the portion of calendar year 1998 during which Resources owned PFG. (c) Pension and Welfare Benefits. During the Term, the Executive ---------------------------- shall continue to participate in the qualified and nonqualified pension, retirement, health and welfare, and insurance plans (including, without limitation, retiree medical plans) provided to other senior vice presidents of the Company (the "Pension Plans") and shall be provided a level of benefits ------------- under such plans comparable to the benefits provided to other senior vice presidents of the Company. Executive shall be granted past service credit under such Pension Plans for all purposes for which service is counted (including, without limitation, eligibility, vesting, waiting periods, preexisting conditions, early retirement, and benefit accrual) for all of his years of service with PFG; provided, however, that if Executive has previously accrued a -------- ------- retirement benefit under a tax qualified PFG defined benefit pension plan, then any retirement benefit due to Executive under any Company sponsored tax qualified defined benefit pension plan will be reduced by Executive's retirement benefit under the PFG plan, to the extent, if any, necessary to prevent duplicate credit for the same years of service (unless the PFG and Company plans are merged, consolidated, or otherwise engage in an asset and liability transfer with respect to Executive, in which case no such reduction shall occur). (d) Fringe Benefits and Perquisites. During the Term, the ------------------------------- Company shall provide to the Executive all of the fringe benefits and perquisites comparable to those provided to other senior vice presidents of the Company, including, without limitation, moving and relocation benefits and expense reimbursement and four weeks paid vacation per year. (e) Business Expenses. The Executive shall be reimbursed for all ----------------- ordinary and necessary business expenses incurred by him in connection with his employment (including, without limitation, expenses for travel and entertainment incurred in conducting or promoting business for the Company) upon submission by the Executive of receipts and other documentation in accordance with the Company's normal reimbursement procedures. 3 (f) SERP. During the Term, Executive shall participate in the ---- Company's Supplemental Executive Retirement Plan ("SERP") on terms and ---- conditions comparable to those provided to other senior vice presidents of the Company. In addition, the Executive shall be granted past service credit under the SERP for benefit accrual and early retirement purposes for all of his years of service with PFG, which the Executive represents commenced on March 9, 1992, and shall be entitled to four additional years of credit under the SERP. The foregoing notwithstanding, the Executive shall be granted two years of credit under the SERP for vesting purposes. Upon being vested in the SERP, amounts payable to the Executive pursuant to the SERP shall be offset by any amounts payable to the Executive pursuant to PFG's Supplemental Executive Retirement Plan. 7. Termination. The Executive's employment hereunder may be ----------- terminated only under the following circumstances: (g) Death. The Executive's employment hereunder shall terminate ----- upon his death. (h) Disability. If, as a result of the Executive's incapacity ---------- due to physical or mental illness, the Executive shall have been absent from his duties hereunder for the entire period of six consecutive months, and within thirty (30) days after written Notice of Termination (as defined in paragraph (e) below) is given, shall not have returned to the performance of his duties hereunder, the Company may terminate the Executive's employment hereunder for "Disability." ---------- (i) Cause. The Company may terminate the Executive's employment ----- hereunder for "Cause." For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder (i) upon the ----- Executive's conviction for the commission of an act or acts constituting a felony under the laws of the United States or any state thereof, or (ii) upon the Executive's willful and continued failure to substantially perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), after written notice has been delivered to the Executive by the Company, which notice specifically identifies the manner in which the Executive has not substantially performed his duties, and the Executive's failure to substantially perform his duties is not cured within ten business days after notice of such failure has been given to the Executive. (j) Termination by the Executive. The Executive may terminate ---------------------------- his employment hereunder for "Good Reason." Good Reason" for termination by the ----------- Executive of the Executive's employment shall mean the occurrence (without the Executive's consent) of any one of the following acts by the Company, or failures by the Company to act: 4 (i) a material failure to comply with Section 6 of this Agreement; (ii) the assignment to the Executive of any duties materially inconsistent with the Executive's status as a senior vice president of the Company or a substantial diminution in the nature or status of the Executive's responsibilities; (iii) the Executive is not elected, reelected, or otherwise continued in the office of the Company or any of its subsidiaries which he held on the Effective Date of this Agreement or at any time subsequent thereto; (iv) the Company requires that the Executive's employment be based other than at Allentown, Pennsylvania or within 65 straight-line miles of Villanova, Pennsylvania; or (v) any purchaser, assign, surviving corporation, or successor of the Company or its business or assets (whether by acquisition, merger, liquidation, consolidation, reorganization, sale or transfer of assets or business, or otherwise) fails or refuses to assume, in writing or by operation of law, this Agreement and all of the duties and obligations of the Company hereunder pursuant to Section 10 hereof. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (k) Notice of Termination. Any termination of the Executive's --------------------- employment by the Company or by the Executive (other than termination under Section 7(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice that shall --------------------- indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (l) Date of Termination. "Date of Termination" shall mean (i) ------------------- ------------------- if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated pursuant to paragraph (b) above, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full- time basis during such thirty (30)-day period), and (iii) if the Executive's employment is terminated pursuant to paragraph (c) or (d) above, the date specified in the Notice of Termination. 5 8. Compensation Upon Termination or During Disability. -------------------------------------------------- (m) Disability or Death. During any period in which the ------------------- Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, the Executive shall continue to receive his full Base Salary, as well as other applicable employee benefits, until his employment is terminated pursuant to Section 7(b) hereof. In the event the Executive's employment is terminated pursuant to Section 7(a) or 7(b) hereof, then the Company shall pay the Executive or the Executive's Beneficiary (as defined in Section 10(b) hereof), as the case may be, (i) all unpaid amounts, if any, to which the Executive was entitled as of the Date of Termination under Section 6(a) hereof, as soon as possible following such termination and (ii) all unpaid amounts to which the Executive was then entitled pursuant to and in accordance with the Incentive Plans, the Pension Plans and any other unpaid employee benefits, accrued vacation, perquisites or other reimbursements. In addition, as of the Executive's employment termination date, all stock options, restricted stock, and other equity-based or performance-based grants or awards shall vest in accordance with the terms of the applicable plans. (n) Termination for Cause; Voluntary Termination Without Good --------------------------------------------------------- Reason. If the Executive's employment is terminated by the Company for Cause or - ------ by the Executive other than for Good Reason, then the Company shall pay to the Executive all unpaid amounts, if any, to which the Executive was entitled as of the Date of Termination under Section 6 hereof (including any salary, Pension Plan payments, accrued vacation, and other employee benefits, perquisites, or reimbursements) within ten (10) days after the Date of Termination, and, except as provided below, the Company shall have no further obligations to the Executive under this Agreement. (o) Termination for Good Reason or Other than for Cause. In the --------------------------------------------------- event that the Executive's employment is terminated by the Executive for Good Reason pursuant to Section 7(d) hereof, or by the Company other than for Cause, then in lieu of further salary or bonus payments (pursuant to Sections 6(a) and 6(b) hereof), the Executive shall be entitled to the following benefits: (1) Severance Pay. Company shall pay to the Executive, as ------------- soon as practicable, a lump sum payment equal to (i) all unpaid amounts, if any, to which the Executive was entitled as of the Date of Termination under Section 6(a) hereof, plus (ii) the present value of all salary and bonus that would have been payable to the Executive pursuant to Sections 6(a) and 6(b) hereof had the Executive continued to be employed for the remainder of the Term, and his Base Salary for each year of the Term were equal to the Base Salary at the Date of Termination and his bonuses under the Incentive Plans for each year of the Term were equal to his targeted bonuses for the fiscal year in which the Date of Termination occurred, plus (iii) all amounts to which Executive 6 is entitled under the Pension Plans and any other unpaid employee benefits, accrued vacation, perquisites or other reimbursements. (2) Long-Term Incentive Award; Equity-Based Compensation. ---------------------------------------------------- The Executive's interest under all of the Company's stock option and long- term incentive plans shall vest in accordance with the terms of the applicable plans. (3) Continuation of Benefits. For the remainder of the ------------------------ Term, the Executive shall be treated as if he had continued to be an executive employee for all purposes under the Company's health and welfare plans. If and to the extent any benefits under this Section 8(c) are not paid or payable or otherwise provided to the Executive or his dependents or beneficiaries under any such plan or policy (whether due to the terms of the plan or policy, the termination thereof, applicable law, or otherwise), then the Company itself shall pay or provide for such benefits. Following this period, the Executive shall be entitled to receive continuation coverage under Part Six of Title I of ERISA ("COBRA Benefits") treating the -------------- end of this period as a termination of the Executive's employment. 9. Non-Disclosure. The parties hereto agree, recognize and -------------- acknowledge that heretofore the Executive has, and during the Term the Executive will obtain knowledge of confidential and/or proprietary information regarding the business and affairs of the Company. It is therefore agreed that the Executive shall respect and protect the confidentiality of all confidential and/or proprietary information pertaining to the Company, and shall not without the prior written consent of the Company, disclose in any fashion such confidential and/or proprietary information to any person at any time during the Term or during the two-year period thereafter, unless required in the course of the Executive's employment hereunder or required by applicable law, rules, regulations or court, governmental or regulatory authority order or decree. 10. Successors; Binding Agreement. ----------------------------- (a) The Company shall require any successor (whether direct or indirect, by asset purchase, stock purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that 7 for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any ------- successor to its business or that otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate (any of which is referred to herein as a "Beneficiary"). ----------- 11. Notice. For the purposes of this Agreement, notices, demands and ------ all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or, (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: PP&L, Inc. Two North Ninth Street Allentown, PA 18101-1171 Attn: General Counsel If to the Executive: Terry H. Hunt 1500 Spring Mill Lane Villanova, PA 19085 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 12. Miscellaneous. No provision of this Agreement may be modified, ------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer of the Company as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by 8 the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13. Governing Law. The validity, interpretation, construction and ------------- performance of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania without regard to its conflicts of law principles. 14. Validity. The invalidity or unenforceability of any provision or -------- provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. Entire Agreement. This Agreement and the Severance Agreement ---------------- between the Executive and the Company dated as of the date hereof set forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes any and all other prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, between the parties hereto concerning the subject matter hereof; and, any prior agreement of the parties hereto in respect of the subject matter contained herein, including, without limitation, the 1992 Employment Agreement between the Executive and PFG and the Retention Agreement dated as of July 18, 1996 between the Executive and PFG. 17. No Mitigation Obligation. The parties hereto expressly agree ------------------------ that the payment of the benefits by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and that the Executive shall not be required to mitigate the amount of any payment provided for in his Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise. 18. D&O Insurance. The Company agrees to maintain adequate directors ------------- and officers liability insurance for the benefit of Executive for the term of this Agreement and for at least three years thereafter on terms and conditions comparable to the same level of protection afforded to any other senior executive officer of the Company. 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. PP&L, INC. By: /s/ William F. Hecht ------------------------------- William F. Hecht Chairman, President and Chief Executive Officer TERRY H. HUNT /s/ Terry H. Hunt -------------------------------------- PENN FUEL GAS, INC. (For Purposes of Section 1(b) Only) By: /s/ Terry H. Hunt ------------------------------------ Name: Terry H. Hunt Title: President 10 EX-10.W.1 18 ASSET PURCHASE AGREEMENT Exhibit 10(q)-1 ----------------------------------------------- ASSET PURCHASE AGREEMENT By and Among BANGOR HYDRO-ELECTRIC COMPANY, a Maine corporation, PENOBSCOT HYDRO CO., INC., a Maine corporation and PP&L GLOBAL, INC., a Pennsylvania corporation Dated as of September 25, 1998 ----------------------------------------------- TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS 1.1 Definitions......................................................... 1 ARTICLE II PURCHASE AND SALE 2.1 The Sale............................................................ 13 2.2 Excluded Assets..................................................... 13 2.3 Assumed Liabilities................................................. 14 2.4 Excluded Liabilities................................................ 16 ARTICLE III PURCHASE PRICE 3.1 Purchase Price...................................................... 18 3.2 Purchase Price Adjustment........................................... 19 3.3 Allocation of Purchase Price........................................ 20 3.4 Proration........................................................... 20 3.5 Exclusion of Purchased Assets from Closing.......................... 21 ARTICLE IV THE CLOSING 4.1 Time and Place of Closing........................................... 22 4.2 Payment of Purchase Price........................................... 22 4.3 Deliveries By Sellers............................................... 22 4.4 Deliveries by the Buyer............................................. 23 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SELLERS 5.1 Organization; Authority............................................ 24 5.2 Authority Relative to This Agreement............................... 24
i 5.3 Consents and Approvals; No Violation............................... 24 5.4 Title and Related Matters.......................................... 25 5.5 Environmental Matters.............................................. 26 5.6 Labor Matters...................................................... 26 5.7 ERISA; Benefit Plans............................................... 27 5.8 Real Estate........................................................ 27 5.9 Condemnation....................................................... 28 5.10 Certain Contracts and Arrangements................................. 28 5.11 Legal Proceedings.................................................. 29 5.12 Permits............................................................ 29 5.13 Taxes.............................................................. 29 5.14 Representations Regarding Bangor-Pacific........................... 31 5.15 Representations Regarding Wyman Unit No. 4......................... 33 5.16 Insurance.......................................................... 33 5.17 Personal Property Included in Purchased Assets..................... 34 5.18 Intellectual Property Rights....................................... 34 5.19 Financial Statements............................................... 34 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BUYER 6.1 Organization....................................................... 34 6.2 Authority Relative to This Agreement............................... 35 6.3 Consents and Approvals; No Violation............................... 35 6.4 Regulation as a Utility............................................ 36 6.5 Availability of Funds.............................................. 36 6.6 Litigation......................................................... 36 6.7 Qualified Buyer.................................................... 36 6.8 Title Policy Commitment............................................ 37 6.9 "AS IS" Sale....................................................... 37 6.10 Buyer's Affiliate.................................................. 37 ARTICLE VII COVENANTS OF THE PARTIES 7.1 Conduct of Business of the Sellers................................. 37 7.2 Access to Information.............................................. 39 7.3 Expenses........................................................... 40 7.4 Further Assurances................................................. 41 7.5 Public Statements.................................................. 42 7.6 Consents and Approvals............................................. 42 7.7 Tax Matters........................................................ 43 7.8 Supplements to Schedules........................................... 45 7.9 Employees.......................................................... 45 7.10 Risk of Loss....................................................... 48
ii 7.11 Confidential Information........................................... 49 7.12 Observation, Inspection and Participation.......................... 50 7.13 Delivery of Books and Records, etc.; Removal of Property........... 51 7.14 Millenium Compliance............................................... 52 ARTICLE VIII CLOSING CONDITIONS 8.1 Conditions to Each Party's Obligations to Effect the Transactions.. 52 8.2 Conditions to Obligations of the Buyer............................. 53 8.3 Conditions to Obligations of the Sellers........................... 56 ARTICLE IX INDEMNIFICATION 9.1 Indemnification.................................................... 57 9.2 Defense of Claims.................................................. 59 ARTICLE X TERMINATION 10.1 Termination........................................................ 63 10.2 Procedure and Effect of Termination................................ 64 ARTICLE XI MISCELLANEOUS PROVISIONS 11.1 Amendment and Modification......................................... 64 11.2 Waiver of Compliance; Consents..................................... 64 11.3 No Survival........................................................ 65 11.4 Notices............................................................ 65 11.5 Assignment......................................................... 66 11.6 Governing Law...................................................... 66 11.7 Counterparts....................................................... 66 11.8 Interpretation..................................................... 66 11.9 Schedules and Exhibits............................................. 67 11.10 Entire Agreement................................................... 67 11.11 No Punitive or Consequential Damages............................... 67 11.12 Parties' Knowledge of Others' Breach............................... 67
iii SCHEDULES 1.1(a)(31) HQ Transfer Agreement Principles 1.1(a)(33) Hydroelectric Assets 1.1(a)(49) Project Maps 1.1(a)(53) Seller Required Consents 1.1(a)(60) Transitional Power Sales Agreement 1.1(a)(61) Transmission Assets 1.1(a)(64) West Enfield Project Finance Documents 2.2(d) Excluded Assets 3.3 Purchase Price Allocation 5.4 Title Matters 5.5 Environmental Matters 5.6 Labor Matters 5.7 Summary of Benefit Plans 5.8 Real Estate, Easements and Encumbrances 5.9 Condemnation 5.10 Sellers' Agreements 5.11 Legal Proceedings 5.12 Permits and Permit Matters 5.13 Tax Matters 5.14 Bangor-Pacific 5.16 Insurance 5.18 Intellectual Property Rights 6.3 Buyer's Consents and Approvals 7.1 Conduct of Business; Capital Expenditures and Maintenance Expenditures EXHIBITS A Form of Bill of Sale B Form of Assignment and Assumption Agreement C Form of FIRPTA Affidavit D Form of Interconnection Agreement E Form of Transitional Power Sales Agreement iv ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated as of September 25, 1998, by and among BANGOR HYDRO-ELECTRIC COMPANY, a Maine corporation ("BHE"), PENOBSCOT HYDRO CO., INC., a Maine corporation ("PHC," and together with BHE, the "Sellers"), and PP&L GLOBAL, INC., a Pennsylvania corporation (the "Buyer"). WHEREAS, the Sellers own certain assets hereinafter defined as the Purchased Assets; WHEREAS, the Sellers conducted an auction of the Purchased Assets, and the Buyer was selected as the winning bidder therefor; WHEREAS, the Buyer and the Sellers desire to provide herein for the purchase and sale of the Purchased Assets; WHEREAS, a material inducement for the Buyer and the Sellers of the purchase and sale provided for herein is the execution on the Closing Date of the Ancillary Agreements as defined herein; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS ----------- 1.1 Definitions. (a) As used in this Agreement, the following terms have ----------- the meanings specified in this Section 1.1(a): (1) "Affiliate" has the meaning set forth in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (2) "Ancillary Agreements" means the Assignment and Assumption Agreement, the Interconnection Agreement (including the Separation Document), the HQ Transfer Agreement, the Transitional Power Sales Agreement and the MEPCO Confirmation Agreement. (3) "Assignment and Assumption Agreement" means the Assignment and Assumption Agreement substantially in the form of Exhibit B hereto to be dated as of the Closing Date pursuant to which Sellers shall assign certain intangible Purchased Assets to Buyer and Buyer shall assume the Assumed Liabilities. (4) "Bid Date" means September 2, 1998. (5) "Bill of Sale" means the Bill of Sale substantially in the form of Exhibit A hereto to be delivered by a Seller at the Closing, relating to the Purchased Assets of such Seller which constitute personal property and which are to be transferred to the Buyer at the Closing (other than those certain intangible Purchased Assets covered by the Assignment and Assumption Agreement). (6) "Business" means the business of ownership, operation and maintenance of the Purchased Assets substantially in the manner such assets were owned, operated and maintained on the Bid Date. (7) "Business Day" shall mean any day other than Saturday, Sunday and any day which is a legal holiday or a day on which banking institutions in Maine or New York are authorized by law or other governmental action to close. (8) "Buyer Representatives" means the Buyer's accountants, employees, counsel, environmental consultants, financial advisors and other authorized representatives. (9) "Capital Expenditures" means those capital expenditures which are identified as capital expenditures on Schedule 7.1. (10) "CERCLA" means the Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended. (11) "Closing" means the closing of the sale of the Purchased Assets. (12) "Closing Date" means the date and time at which the Closing actually occurs. (13) "Code" means the Internal Revenue Code of 1986, as amended. All citations to the Code or to the Treasury Regulations promulgated thereunder ("Treasury Regulations") shall include any amendments thereto and any substitute or successor provisions thereto. (14) "Collective Bargaining Agreement" means the Union Agreement between BHE and Local Union No. 1837 of the International Brotherhood of Electrical Workers ("Local 1837"), effective January 1, 1996, as the same may be amended from time to time. (15) "Confidentiality Agreement" means the Confidentiality Agreement dated May 19, 1998 between BHE and Buyer. (16) "DOE" means the United States Department of Energy. (17) "Easements" means the reservations of easements in favor of BHE to be included in the deeds of conveyance with respect to the Purchased Assets constituting Real Estate as set forth in the Interconnection Agreement and the Separation Document. (18) "Encumbrances" means any mortgages, pledges, liens, security interests, conditional and installment sale agreements, options, claims, possessory interests, title retention 2 agreements, devices or arrangements (including any lease and the nature thereof), choate or inchoate tax liens, charges, assessments, covenants, reservations, rights of first refusal, rights to acquire, rights of use, restrictions (whether on use, operation, sale, transfer or otherwise), whether imposed by deed, agreement, law or otherwise, activity and use limitations, and conservation and other easements. (19) "Environmental Laws" means all Federal, state, municipal and local laws (including common laws), regulations, rules, ordinances, codes, licenses, decrees, judgments, directives, or judicial or administrative orders relating to pollution, protection, preservation or restoration of human health, the environment or natural resources, including, without limitation, laws relating to Releases or threatened Releases of Hazardous Substances (including, without limitation, into or through ambient air, surface water, groundwater, land, wetlands, surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances, including without limitation the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act, and CERCLA, in each case as amended, and their local counterparts. (20) "Environmental Matters" means any notice of violation or any claim, demand, liability, obligation, penalty, sanction, abatement or order or direction by any governmental authority or any person for personal injury (including death), tangible or intangible property damage, damage to the environment or natural resources, pollution or contamination arising under Environmental Laws. (21) "Environmental Reports" means, collectively, the Phase 1 Environmental Assessments relating to the Hydroelectric Facilities prepared by Dames & Moore as provided to the Buyer in the Supplement dated May 4, 1998 to the Offering Memorandum dated April 1998, and as such reports may be amended from time to time prior to the Closing Date solely for purposes of including additional items therein. (21A) "Equity Contribution Agreement" means the Equity Contribution Agreement dated September 25, 1998 among Buyer, Sellers and PP&L Resources, Inc. (22) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (23) "Estimated Adjustment Amount" means the Sellers' good faith reasonable estimate of the Adjustment Amount for the Closing, calculated in accordance with Section 3.2(b) hereof. (24) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (25) "Federal Power Act" means the Federal Power Act of 1935, as amended. (26) "FERC" means the Federal Energy Regulatory Commission. (27) "FIRPTA Affidavit" means a Foreign Investment in Real Property Tax Act Certification and Affidavit substantially in the form of Exhibit C hereto. 3 (28) "Good Utility Practice" means any of the applicable practices, methods and acts: (i) required of the party to whom Good Utility Practice is being applied under regulations of the National Electric Safety Code, New England Power Pool ("NEPOOL"), Northeast Power Coordinating Council, a regional reliability governing body, North American Electric Reliability Council, or the successor of any of them, whether or not the party whose conduct is at issue is a member thereof; or (ii) otherwise engaged in or approved by a significant portion of the electric utility industry during the relevant time period; which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost to the party being expected to apply Good Utility Practice, consistent with law, regulation, good business practices, generation, transmission, and distribution reliability, safety, and expedition. Good Utility Practice is intended to include practices, methods, or acts generally accepted in the region, and is not intended to be limited to optimum practices, methods, or acts to the exclusion of all others. Good Utility Practice does not include intentional disregard of contractual commitments, even if those commitments are uneconomic under current market conditions. (29) "Hazardous Substances" means (a) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid which may contain levels of polychlorinated biphenyls; (b) any chemicals, materials or substances defined in any applicable Environmental Law as or included in the definition of "hazardous substances," "hazardous chemicals," "hazardous wastes," "hazardous materials," "hazardous matter," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants" or "pollutants" or words of similar meaning or regulatory effect; or (c) any other chemical, material or substance, the discharge, emission or Release of which is prohibited, limited or regulated by any applicable Environmental Law. (30) "Holding Company Act" means the Public Utility Holding Company Act of 1935, as amended. (31) "HQ Transfer Agreement" means an agreement to be mutually agreed by BHE and Buyer prior to the Closing Date in accordance with the principles set forth in Schedule 1.1(a)(31) pursuant to which the rights and obligations described in clause (ii) of the definition of "Transmission Assets" are to be conveyed by BHE to Buyer, and the Additional Payments are to be made by Buyer to BHE. (32) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (33) "Hydroelectric Assets" means, subject to the Easements and Section 2.2, all of the Sellers' right, title and interest in, to and under: (a) the real property described in clause (i) 4 below and the personal property, tangible or intangible, constituting or used or held for use principally for the Business in connection with, or, as determined pursuant to the Separation Document, necessary for the Business in connection with, the hydroelectric facilities listed on Schedule 1.1(a)(33) (the "Hydroelectric Facilities"), and (b) PHC's interest in Bangor-Pacific, including, but not limited to, the following assets owned by the Sellers: (i) with respect to each of the Hydroelectric Facilities and excluding any Excluded Assets, the real property (including all buildings, structures, fixtures and other improvements thereon) described in the deeds referenced in Schedule 5.8 (subject to the Separation Document) and contained within the boundary description set forth or referred to in the applicable FERC license, easements and rights of way of record relating to the Hydroelectric Facilities in favor of Sellers, as well as the real property described in the applicable Project Map as being included in the Hydroelectric Assets (other than any property identified therein as property being retained by Sellers) (the "Hydroelectric Facilities Real Property"); (ii) all inventories of supplies, materials and spares (a listing of which, as of the Bid Date, is included in Schedule 1.1(a)(33)) located at, held for use principally in connection with or in transit to any of the Hydroelectric Facilities on the Closing Date; (iii) the machinery, equipment, furniture and other personal property (but excluding any Excluded Assets) located at or held for use principally in connection with any of the Hydroelectric Facilities on the Closing Date, including, without limitation, the items of personal property identified in Schedule 1.1(a)(33) as being associated with any of the Hydroelectric Facilities as of the Bid Date and all warranties against manufacturers or vendors relating thereto to the extent such warranties are freely transferable by the Sellers; (iv) the vehicles, boats, trailers and other rolling stock utilized or held for use as of the Closing Date by any of the Sellers principally in connection with any of the Hydroelectric Facilities including, without limitation, the items included in Schedule 1.1(a)(33) as of the Bid Date, and all warranties against manufacturers or vendors relating thereto to the extent such warranties are freely transferable by the Sellers; (v) the contracts, agreements and personal property leases listed on Schedule 5.10 that are described therein as being associated with any of the Hydroelectric Facilities or the related Business and are assignable; (vi) except for prepaid expenses and deposits of any of the Sellers attributable to contracts constituting Excluded Assets, all prepaid expenses, progress payments and deposits of or by any of the Sellers, rights to receive a prepaid expense, deposit or progress payment, and cash in transit that constitutes a prepaid expense, progress payment or deposit, if any, relating to the conduct of the Business in connection with any of the Hydroelectric Facilities, including without limitation the items listed on Schedule 1.1(a)(33); 5 (vii) all books, operating and maintenance records, operating, safety and maintenance manuals, engineering or design plans, drawings, blueprints and as-built plans, specifications, procedures and similar items of Sellers relating specifically to any of the Hydroelectric Facilities, other than books of account; (viii) all trade secrets, patents and patentable inventions owned by any of the Sellers, to the extent necessary for the ownership, operation and maintenance of the assets described in clauses (i)-(vii) of this Section 1.1(a)(33), and any rights of Sellers in and to the names of the Hydroelectric Facilities; (ix) all rights, privileges, claims, causes of action and options relating to the Business in connection with any of the Hydroelectric Facilities (including any of the Sellers' goodwill therein); (x) any other warranties and indemnities given by third parties with respect to any of the assets described above or in connection with the Business conducted in connection with any of the Hydroelectric Facilities; (xi) BHE's "Request for Rehearing and Clarification" filed at the FERC on May 20, 1998 in respect of Projects Nos. 10981, 2712, 2534, 2403 and 2710 and Docket No. DI97-10, and all causes of action and rights thereunder, and all causes of action and rights arising in any of those proceedings, together with their supporting documents, including, but not limited to, applications, exhibits and drawings; and (xii) All of the rights and other assets of BHE described on Schedule 1.1(a)(33) relating to the license applications and water quality permits associated with the Basin Mills Project No. 10981, the Medway Project No. 2666 and the Howland Project No. 2721 (in each case as defined in such schedule), together with their supporting documents, including, but not limited to, applications, exhibits and drawings. (34) "Hydro Quebec Agreements" means those agreements listed under the heading "Hydro Quebec Agreements" in Schedule 5.10. (35) "Indentures" means, collectively, (i) the Mortgage and Deed of Trust, dated as of July 1, 1936, from BHE to Citibank, N.A., successor by merger to City Bank Farmers Trust Company, as trustee, as from time to time amended and supplemented, and (ii) the General and Refunding Mortgage Indenture and Deed of Trust, dated as of June 1, 1995, from BHE to Chase Manhattan Bank, N.A., successor by merger to Chemical Bank, as trustee, as from time to time amended and supplemented. (36) "Independent Accounting Firm" means an independent accounting firm of national reputation mutually appointed by the Sellers and the Buyer. (37) "Interconnection Agreement" means the Interconnection Agreement substantially in the form of Exhibit D hereto to be dated as of the Closing Date, between BHE and the Buyer. 6 (38) "Knowledge" means the actual and conscious knowledge of the members of management of Sellers or Buyer, as the case may be, after reasonable inquiry by them of selected employees of the Sellers or Buyer, as the case may be, whom they believe, in good faith, to be the persons generally responsible for the subject matters to which the knowledge is pertinent. (39) "Maintenance and Capital Expenditures Amount" means the aggregate amount of all funds actually expended on, or for which liabilities were accrued with respect to, Maintenance Expenditures and Capital Expenditures by BHE, if any, during the period beginning on the date hereof and ending on the Closing Date, but not to exceed $500,000 in the aggregate except as agreed in writing by Buyer. (40) "Maintenance Expenditures" means those maintenance expenditures which are identified as maintenance expenditures on Schedule 7.1. (41) "Material Adverse Effect" means any change in or effect on the Purchased Assets or the Business after the Bid Date that is, individually or in the aggregate, materially adverse to the physical condition, ownership or operation of the Purchased Assets (including without limitation any change or effect resulting from governmental action) and which change or effect causes the value of the Purchased Assets, taken as a whole, to decrease by more than ten percent (10%), other than any such materially adverse change in or effect on the Purchased Assets which is cured (including by the payment of money) by the Sellers before the Closing Date. (42) "MEPCO Confirmation Agreement" means the agreement of even date herewith between BHE and Buyer providing for the terms of the reassignment by BHE of the MEPCO Reservation to Buyer effective as provided therein. (43) "MEPCO Reservation" means BHE's transmission service reservation with Maine Electric Power Company ("MEPCO"), pursuant to (i) 45 MW Long Term Firm Transmission Service Agreement dated July 9, 1996 between MEPCO and BHE, as extended by the Letter Agreement dated September 12, 1997 (the "Letter Agreement") between MEPCO and BHE and (ii) 55 MW Long Term Firm Transmission Service Agreement dated July 24, 1996 between MEPCO and BHE, as extended by the Letter Agreement. This reservation is for firm point-to-point transmission service from the Maine/New Brunswick border to the MEPCO 345/115 kV substation in Orrington, Maine, in the amount of 100 megawatts pursuant to the MEPCO transmission tariff filed at and approved by FERC. (44) "Milford Project" means, subject to Section 2.2, the hydroelectric generating plant and associated equipment and property described in its FERC license, located in Milford, Maine as described in Schedule 1.1(a)(33). (45) "MPUC" means the Maine Public Utilities Commission. (46) "Permitted Encumbrances" means: (i) those Encumbrances and exceptions to the title to the Purchased Assets set forth in Schedule 5.8 in the form delivered on the date hereof and the Easements, provided that such Encumbrances, exceptions and Easements do not render title to the Purchased Assets unmarketable or prevent adequate access to the Purchased 7 Assets to which they relate, or materially interfere with the continuing ownership, use, operation or maintenance of such assets consistent with historical practice or materially detract from the Business; (ii) all exceptions, restrictions, easements, charges, licenses, leases, rights-of-way and encumbrances which, as of the Bid Date, are matters of record or are set forth in an applicable FERC project license, except for such encumbrances which secure indebtedness, provided that, to the Knowledge of Sellers, no such items render title to the Purchased Assets unmarketable or prevent adequate access to the Purchased Assets to which they relate, or materially interfere with the continuing ownership, use, operation or maintenance of such assets consistent with historical practice or materially detract from the Business; (iii) when such term is used with respect to any date before the Closing Date, Encumbrances created by the Indentures or, to the extent of Encumbrances specifically described in such Schedule, the agreements listed in Schedule 5.10 in the form delivered on the date hereof; (iv) Encumbrances incurred in connection with the Sellers' purchase of properties or assets constituting Purchased Assets in the ordinary course of business securing all or a portion of the purchase price therefor; (v) when such term is used with respect to any date prior to the Closing Date, Encumbrances permitted by the Indentures; (vi) statutory liens for current taxes or assessments not yet delinquent or the validity of which is being contested in good faith by appropriate proceedings; (vii) when such term is used with respect to any date prior to the Closing Date, mechanics', carriers', workers', repairers' and other similar liens arising or incurred in the ordinary course of business; (viii) zoning, entitlement, conservation restriction and other land or water use or Environmental Laws or regulations administered by governmental authorities; (ix) such other minor liens, imperfections in or failures of title, charges, easements, restrictions and encumbrances, whether or not of record, which, individually or in the aggregate, do not materially detract from the value of the Purchased Assets as currently used or materially interfere with the ownership, use, operation or maintenance of the Purchased Assets; and (x) with respect to the Wyman Assets, the terms and provisions of the Wyman Agreements. (47) "Person" means any individual, partnership, limited liability company, limited liability partnership, joint venture, corporation, trust, unincorporated organization and any governmental entity or any department or agency thereof. (48) "Pre-Closing Periods" means all Tax periods ending on or before the Closing Date and, with respect to any Tax period that includes but does not end on the Closing Date, the portion of such period that includes and ends on the Closing Date. (49) "Project Maps" means the maps contained in Schedule 1.1(a)(49) provided by the Sellers depicting certain portions of the Hydroelectric Facilities Real Property and the Excluded Assets. (50) "Purchased Assets" means collectively the Hydroelectric Assets, the Wyman Assets and the Transmission Assets, provided, that the term "Purchased Assets" does not include any fuel, supplies, materials, spares or other inventory listed as such on the schedules to this agreement to the extent such fuel, supplies, materials, spares or inventory are used at or incorporated into the Purchased Assets prior to the Closing Date and, for the avoidance of doubt, Buyer acknowledges that for purposes of Sellers' representations and warranties contained in this Agreement, "Purchased Assets" does not refer in any way to Wyman Station, but only to Sellers' right, title and interest in the Wyman Assets. 8 (51) "Release" means release, spill, leak, discharge, dispose of, pump, pour, emit, empty, inject, leach, dump or allow to escape into or through the environment. (52) "SEC" means the Securities and Exchange Commission. (53) "Seller Required Consents" means those consents and waivers listed or referenced on Schedule 1.1(a)(53) attached hereto. (54) "Sellers' Agreements" means those agreements listed or referenced on Schedule 5.10. (55) "Separation Document" means the Separation Document to be prepared under the terms of the Interconnection Agreement. (56) [Intentionally omitted.] (57) "Tax Return" means any return, report, information return or other document (including any related or supporting information) required to be supplied to any authority with respect to Taxes. (58) "Tax" or "Taxes" means any or all taxes, charges, fees, levies, penalties or other assessments imposed by any United States Federal, state or local or foreign taxing authority, including, but not limited to, income, excise, property, sales, use, transfer, franchise, payroll, withholding, social security or other taxes, including any interest, penalties or additions attributable thereto. (59) "Title Insurance Company" means Lawyers' Title Insurance Corporation or First American Title Insurance Company or another reputable title insurance company selected by Buyer and reasonably acceptable to Sellers. (60) "Transitional Power Sales Agreement" means a Transitional Power Sales Agreement to be mutually agreed by BHE and Buyer prior to the Closing Date providing for the sale by Buyer to BHE of installed capacity and energy from the Hydroelectric Facilities, which agreement shall be based on the form thereof attached as Exhibit E which shall be modified by BHE and Buyer in accordance with the principles set forth in Schedule 1.1(a)(60). (61) "Transmission Assets" means (i) BHE's rights to develop and utilize a second 345kV tie-line with New Brunswick Power Corporation as described in Schedule 1.1(a)(61) (the "345 Line") and (ii) BHE's rights and obligations under the Hydro Quebec Agreements, but does not include ownership or operational control of any of such transmission facilities nor any obligations to make support payments pursuant to the Hydro Quebec Agreements. (62) "WARN Act" means the Federal Worker Adjustment Retraining and Notification Act of 1988. 9 (63) "West Enfield Hydro Project" means the 13 MW hydroelectric power station and associated dam and reservoir located on the Penobscot River just upstream of its confluence with the Piscataquis River in the towns of Enfield and Howland, Maine. (64) "West Enfield Project Finance Documents" means the agreements and documents listed in Schedule 1.1(a)(64). (65) "Window Expiration Date" means the later of (i) the date six months from the date of this Agreement and (ii) the date three months prior to the Closing Date. (66) "Wyman Agreements" means (i) the William F. Wyman Unit No. 4 Agreement for Joint Ownership, Construction and Operation, dated as of November 1, 1974, by and among BHE, Central Maine Power Company, Maine Public Service Company, Boston Edison Company, Fitchburg Gas and Electric Light Company, Montaup Electric Company, New England Power Company, New Bedford Gas and Edison Light Company, Newport Electric Corporation, Public Service Company of New Hampshire, Central Vermont Public Service Corporation, Green Mountain Power Corporation, City of Burlington Electric Department, Village of Lyndonville Electric Department, and Massachusetts Municipal Wholesale Electric Company, as amended by Amendments Nos. 1, 2 and 3 dated, respectively, June 30, 1975, August 16, 1976 and December 31, 1978, as amended (the "Wyman Joint Ownership Agreement"), (ii) The William F. Wyman Unit No. 4 Transmission Agreement, dated as of November 1, 1974, as amended, by and among BHE and the other parties to the agreement described in clause (i) above, and (iii) the deed to BHE of its joint ownership interest in common in Wyman Unit No. 4, by deed of Central Maine Power Company to BHE et. al., dated December 22, 1976, and recorded in the Cumberland County Registry of Deeds in Book 3955, Page 140. (67) "Wyman Assets" means, subject to Section 2.2, BHE's entire joint ownership interest in Unit 4 of Wyman Station as set forth in the Wyman Agreements, including, but not limited to, the following assets to the extent of BHE's interest therein under the Wyman Agreements: (i) the real property associated with Unit 4 of Wyman Station or the related Business; (ii) all inventories of fuels, supplies, materials and spares located at, held for use principally in connection with, or in transit to Unit 4 of Wyman Station on the Closing Date; (iii) the machinery, equipment, furniture and other personal property (but excluding any Excluded Assets) located at or held for use principally in connection with Unit 4 of Wyman Station on the Closing Date; and (iv) the vehicles, trailers and other rolling stock utilized or held for use as of the Closing Date in connection with Unit 4 of Wyman Station. 10 (68) "Wyman Station" means the electric generating facilities known as the William F. Wyman Station (sometimes referred to as Yarmouth Station) located in Yarmouth, Maine. (b) Each of the following terms has the meaning specified in the Section set forth opposite such term: Term Section ---- ------- Additional Payments 3.1 Adjustment Amount 3.2(b) Adjustment Statement 3.2(b) Ancillary Agreements Recitals Assumed Liabilities 2.3(b) Audited Balance Sheet 5.19 Bangor-Pacific 5.14(b) Bangor-Pacific Interest 5.14(b) Bangor-Pacific Operating Co. 5.14(b) Basin Mills Hydro Project Schedule 1.1(a)(33) BHE Recitals BP Permits 5.14(i) Buyer Recitals Buyer Group 9.1(a) Buyer Required Regulatory Approvals 6.3(b) Buyer's Window 7.9(a) Century Date Compliant 7.14 Certain Indemnifiable Loss 9.1(a) Closing Conditions 4.1 COBRA 7.9(h) Direct Claim 9.2(c) Employee Transition Plan 7.9(f) Employees 7.9(a) Environmental Condition 9.2(f) Environmental Permits 5.5(a) EPA 5.3(b) ERISA Affiliate Plan 2.4(vii) Excluded Assets 2.2 Excluded Liabilities 2.4 Final 8.1(c) HIPAA 7.9(h) HQ Transmission Support Agreements Schedule 5.10 Hydroelectric Facilities 1.1(a)(33)(a) Hydroelectric Facilities Real Property 1.1(a)(33)(i) Indemnifiable Loss 9.1(a) Indemnifying Party 9.1(d) Indemnitee 9.1(c) 11 Term Section ---- ------- Information 7.2(b) Initial Payment 3.1 Intellectual Property 5.18 Inventory Adjustment Amount 3.2(b) Letter Agreement 1.1(a)(43) Local 1837 1.1(a)(14) Maine Restructuring Law 7.9(a) MDEP 5.3(b) MEPCO 1.1(a)(43) NEPOOL 1.1(a)(28)(i) Other Intellectual Property 5.18 Permits 5.12 PHC Recitals Preliminary Purchase Price 4.2 Prior Welfare Plans 7.9(d) Process 7.14(a) Purchase Price 3.1 Purchased Assets Employee 2.4(iv) Remediation 9.2(f) Replacement Welfare Plans 7.9(d) Representative 7.11(a) Real Estate 5.8 Site Representatives 7.12 Seller Indemnified Environmental Losses 9.1(a) Seller Required Regulatory Approvals 5.3(b) Sellers Recitals Sellers Group 9.1(b) Technology 7.14 Termination Date 10.1(b) Third Party Claim 9.2(a) 345 Line 1.1(a)(61) 345 Line ROWs Schedule 1.1(a)(61) Title Commitment 6.8 Transferred Employee 7.9(a) Treasury Regulations 1.1(a)(13) Unaudited Balance Sheet 5.19 Veazie Hydro Project Schedule 1.1(a)(33) VRAP 9.2(f) West Enfield Loan Agreement Schedule 1.1(a)(64) West Enfield Joint Venture Agreement Schedule 5.10 Wyman 4 Interest 5.15 Wyman Joint Ownership Agreement 1.1(a)(66) 12 ARTICLE II PURCHASE AND SALE ----------------- 2.1 The Sale. Upon the terms and subject to the satisfaction of the -------- conditions contained in this Agreement (or waiver of such conditions as permitted by this Agreement), at the Closing the Sellers will sell, assign, convey, transfer and deliver to the Buyer, and the Buyer will purchase and acquire from Sellers, free and clear of all Encumbrances (except for those Permitted Encumbrances which are permitted by definition to survive after the Closing Date), all of the Sellers' right, title and interest in, to and under the Purchased Assets. 2.2 Excluded Assets. Notwithstanding any provisions herein to the --------------- contrary, the Purchased Assets shall not include the following assets of Sellers (herein referred to as the "Excluded Assets"): (a) all cash, cash equivalents, bank deposits, accounts receivable, notes receivable, checkbooks and canceled checks, regulatory assets and any income, sales, payroll or other tax receivables; (b) certificates of deposit, shares of stock, securities, bonds, debentures, evidences of indebtedness, and interests in joint ventures, partnerships, limited liability companies and other entities (other than those described in Sections 1.1(a)(67) and 1.1(a)(33)(b) hereof); (c) any trade names, trademarks, service marks or logos incorporating or associated with any names of the Sellers, provided that Buyer shall be authorized to continue to use for internal purposes only and not for public use, materials bearing such names, trademarks or logos (such as employee manuals) used by Sellers prior to the Closing Date until such materials are reprinted or otherwise replaced; (d) all transmission, distribution, and substation facilities, including, but not limited to, those described or referred to in Schedule 2.2(d), the precise delineation and composition of which shall be subject to the Separation Document; (e) all contracts between BHE and customers purchasing electric capacity and energy from BHE under wholesale rates or otherwise subject to regulation by the FERC and all contracts of any nature of Sellers which do not expressly constitute Purchased Assets; (f) any refund or credit (i) related to real or personal property, excise, sales or use Taxes paid by the Sellers prior to the Closing Date in respect of the Purchased Assets, or paid by the Sellers after the Closing Date but relating to periods prior to the Closing Date, whether such refund is received as a payment or as a credit against future real or personal property, excise, sales or use Taxes payable, or (ii) arising under any Sellers' Agreement and relating to a period before the Closing Date; 13 (g) except to the extent required by law, all personnel records relating to the Purchased Assets Employees who become employees of the Buyer; (h) any amounts payable or which become payable pursuant to claims asserted by any of the Sellers with respect to periods prior to the Closing Date relating to the Purchased Assets, including, without limitation, all contractual and equitable rights of BHE to receive payments from any other holder of a joint ownership interest in Wyman Unit No. 4 pursuant to Sections 5, 6, 7 or 7.1 of the Wyman Joint Ownership Agreement as a result of the sale by such holder of real or personal property constituting a portion of Wyman Station regardless of when such sale is consummated (but excluding any rights relating to the development, construction or operation of a future generating unit at the Wyman Station site arising under the second paragraph of Section 5 of the Wyman Joint Ownership Agreement); and (i) all real property of Sellers described in the Project Maps or in Schedule 5.8 or any other part of this Agreement as real property to be retained by Sellers. 2.3 Assumed Liabilities. ------------------- (a) On the Closing Date, the Buyer and the Sellers shall enter into the Assignment and Assumption Agreement, pursuant to which, among other things, the Buyer shall assume and agree to discharge, when due, all of the liabilities and obligations of the Sellers, direct or indirect, known or unknown, absolute or contingent, which arise and are attributable to the period after the Closing Date and relate solely to the Purchased Assets or which arose or relate to the period on or prior to the Closing Date and are specifically referred to in this Section 2.3(a), other than Excluded Liabilities, in accordance with the respective terms and subject to the respective conditions thereof. Without limitation of the foregoing, the following liabilities and obligations shall be included in the Assumed Liabilities: (i) all liabilities and obligations of the Sellers, to the extent and only to the extent arising and attributable to the period after the Closing Date, under (a) the Sellers' Agreements and the real property leases comprising a part of the Purchased Assets in accordance with the terms thereof, (b) the Permits and Environmental Permits that are transferred to Buyer and (c) the contracts, leases and other agreements entered into by the Sellers with respect to the Purchased Assets after the date hereof in the ordinary course of business and consistent with the terms of this Agreement (including, without limitation, agreements with respect to liabilities for real or personal property Taxes on any of the Purchased Assets entered into by any Seller and any local government and in all cases involving agreements requiring Buyer's consent under Section 7.1, solely such agreements entered into with the prior written consent of Buyer); provided that Assumed Liabilities shall not include liabilities and obligations to the extent such liabilities and obligations, but for a breach or default by either of the Sellers, would have been paid, performed or otherwise discharged specifically by their terms or the terms hereof on or prior to the Closing Date or to the extent the same arise out of any such breach or default; (ii) all liabilities and obligations in respect of Taxes for which the Buyer is liable pursuant to Section 7.7; 14 (iii) any liabilities and obligations associated with the Purchased Assets for which the Buyer has indemnified the Sellers pursuant to Section 9.1; (iv) all liabilities and obligations with respect to the Transferred Employees for which the Buyer is responsible pursuant to Section 7.9; (v) any liability, obligation or responsibilities under or related to former, current or future Environmental Laws, Environmental Matters or the common law, whether such liability or obligation or responsibility is known or unknown, contingent or accrued, arising as a result of or in connection with (a) any violation or alleged violation of Environmental Laws with respect to the ownership or operation of the Purchased Assets after the Closing Date; (b) compliance with applicable Environmental Laws with respect to the ownership or operation of the Purchased Assets after the Closing Date; (c) loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by the presence or Release of Hazardous Substances at, on, in, under, adjacent to, or migrating from the Purchased Assets after the Closing Date, including, but not limited to, Hazardous Substances contained in building materials at the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at or adjacent to the Purchased Assets; (d) loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by the offsite disposal, storage, transportation, discharge, Release or recycling of Hazardous Substances in connection with the ownership or operation of the Purchased Assets after the Closing Date; (e) the investigation and/or remediation of Hazardous Substances that have been Released at, on, in, under, adjacent to, or migrating from the Purchased Assets after the Closing Date, including, but not limited to, Hazardous Substances contained in building materials at the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at the Purchased Assets; (f) the investigation and/or remediation of Hazardous Substances that are disposed, stored, transported, discharged, Released or recycled at any off-site location after the Closing Date in connection with the ownership or operation of the Purchased Assets; and (g) any violation or alleged violation of Environmental Law, and any loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by (i) negligent acts or omissions by the Buyer at any of the Purchased Assets; (ii) acts or omissions by the Buyer at any of the Purchased Assets which cause a condition not in violation of Environmental Law or not in need of remediation under Environmental Law on or prior to the Closing Date to be in violation of Environmental Law or in need of remediation under Environmental Law (including, without limitation, the Release or destabilization of Hazardous Substances which are in a stable or contained state and are in compliance with all applicable Environmental Laws); or (iii) negligent acts or omissions by the Buyer at any of the Purchased Assets after the Closing Date that exacerbate or aggravate any condition in violation of Environmental Law or in need of remediation under Environmental Law on the Closing Date, to the extent of any such negligent exacerbation or aggravation; provided, that the mere discovery or failure to discover by the Buyer of a violation of Environmental Law or a condition in need of remediation under Environmental Law which violation or condition existed on the Closing Date, in and of itself shall not be included in this clause (g); provided, that 15 nothing set forth in this Section 2.3(a)(v) shall require the Buyer to assume any liabilities that are described in Section 2.4(v) or 2.4(vi); (vi) all liabilities incurred by any of the Sellers for payment of Maintenance Expenditures and Capital Expenditures directly related to the Purchased Assets to the extent not included in the Maintenance and Capital Expenditures Amount and agreed to be reimbursed in writing by Buyer; and (vii) with respect to the Purchased Assets, (a) any Tax that may be imposed by any state or local government on the ownership, sale, operation, or use of the Purchased Assets with respect to the periods after the Closing Date, including real or personal property Taxes except as otherwise provided in Section 7.7, (b) any software license transfer, reissuance or similar costs relating to any of the Purchased Assets and (c) Permitted Encumbrances which are permitted by definition to survive the Closing Date. (b) All of the foregoing liabilities and obligations to be assumed by the Buyer under Section 2.3(a) (excluding any Excluded Liabilities) are referred to herein as the "Assumed Liabilities." None of the liabilities and obligations of the Sellers assumed by Buyer are intended to be expanded, increased, broadened or enlarged as to rights or remedies of third parties against the Buyer as compared to such rights or remedies which such parties would have had against the Sellers had the transactions contemplated by this Agreement not taken place. (c) Subject to Section 9.2(f), the parties agree and acknowledge that after the Closing Date the Buyer shall be entitled exclusively to control any litigation, administrative or regulatory proceeding or investigation arising out of or related to any Assumed Liabilities and the Sellers agree to promptly notify the Buyer of the institution or commencement of any of the foregoing and to cooperate fully with the Buyer in connection therewith (provided that Sellers' cooperation need not include the payment of money or any other financial accommodation). 2.4 Excluded Liabilities. Except as expressly stated in this Agreement to -------------------- the contrary, Buyer shall not assume and shall not be responsible for, and Sellers shall be and remain liable for, the payment, performance or discharge of any liability or obligation of Sellers whatsoever other than the Assumed Liabilities. Sellers covenant and agree that they will fully discharge (or mutually settle, compromise or, as provided in Section 9.1, indemnify the Buyer against) all their respective liabilities and obligations as to which Sellers' failure to so discharge or settle could result in an Encumbrance against any of the Purchased Assets or a claim against Buyer, except the Assumed Liabilities. All such liabilities and obligations not being assumed by Buyer pursuant to Section 2.3 are herein called the "Excluded Liabilities." Without limitation of the foregoing, the Excluded Liabilities shall include without limitation, the following liabilities or obligations: (i) any liabilities or obligations of any of the Sellers in respect of any Excluded Assets or other assets of the Sellers which are not Purchased Assets; (ii) any liabilities or obligations in respect of Taxes for which any of the Sellers are liable pursuant to Section 7.7; 16 (iii) any liabilities or obligations of the Sellers with respect to commitments for the purchase or sale of power or fuel, other than under any Sellers' Agreement; (iv) Except for obligations assumed by Buyer under Section 7.9, any liabilities or obligations relating to the Sellers' employment of, termination of employment of, provision of benefits to, and compensation of employees employed at the Purchased Assets, including but not limited to an employee whose employment principally relates to any of the Purchased Assets (a "Purchased Assets Employee"), and any personal injury, discrimination, harassment, wrongful discharge or other wrongful employment practice, unfair labor practice, claims for benefits (including claims arising under ERISA or workers' compensation laws), or similar claims or causes of action, known or unknown, absolute or contingent, asserted or unasserted, of any such person arising out of acts or omissions occurring or otherwise attributable to the period on or before the Closing Date; (v) any liabilities, obligations, or responsibilities under or related to former, current or future Environmental Laws, Environmental Matters or the common law, whether such liability or obligation or responsibility is known or unknown, contingent or accrued, arising as a result of or in connection with (a) any violation or alleged violation of Environmental Laws with respect to the offsite disposal, storage, transportation, discharge, Release or recycling of Hazardous Substances on or prior to the Closing Date in connection with the ownership, operation or maintenance of the Purchased Assets; (b) compliance with applicable Environmental Laws with respect to the offsite disposal, storage, transportation, discharge, Release or recycling of Hazardous Substances on or prior to the Closing Date in connection with the ownership, operation or maintenance of the Purchased Assets; (c) loss of life, injury to persons or property or damage to natural resources (whether or not such loss, injury or damage was made manifest before or after the Closing Date) caused (or allegedly caused) by the offsite disposal, storage, transportation, discharge, Release or recycling of Hazardous Substances on or prior to the Closing Date in connection with the Purchased Assets, or the ownership, operation or maintenance of the Purchased Assets; and (d) the investigation and/or remediation (whether or not such investigation or remediation commenced on or before the Closing Date) of Hazardous Substances that are disposed, stored, transported, discharged, Released or recycled, or the arrangement for such activities at any off-site location, on or prior to the Closing Date, in connection with the Purchased Assets or the ownership, operation or maintenance of the Purchased Assets; (vi) any liabilities, obligations or responsibilities under or related to former, current or future Environmental Laws, Environmental Matters or the common law, whether such liability, obligation or responsibility is known or unknown, contingent or accrued, arising as a result of or in connection with (a) any violation or alleged violation of Environmental Laws with respect to the ownership or operation of the Purchased Assets on or prior to the Closing Date; (b) compliance with applicable Environmental Laws with respect to the ownership or operation of the Purchased Assets on or prior to the Closing Date; (c) loss of life, injury to persons or property or damage to natural resources (whether or not such loss, injury or damage was made manifest before or after the Closing Date) caused (or allegedly caused) by the presence or Release of Hazardous 17 Substances at, on, in, under, adjacent to or migrating from the Purchased Assets on or prior to the Closing Date, including, but not limited to, Hazardous Substances contained in building materials at the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at or adjacent to the Purchased Assets on or prior to the Closing Date and (d) the investigation and/or remediation (whether or not such investigation or remediation commenced on or before the Closing Date) of Hazardous Substances that are present or have been Released at, on, in, under, adjacent to or migrating from the Purchased Assets on or prior to the Closing Date, including, but not limited to, Hazardous Substances contained in building materials at the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at or adjacent to the Purchased Assets on or prior to the Closing Date; (vii) any liabilities or obligations of Sellers relating to any benefit plan, or to any "employee pension benefit plan" (as defined in Section 3(2) of ERISA) of Sellers, whether or not terminated, established, maintained or contributed to by any of the Sellers or any of their ERISA Affiliates at any time, or to which any of the Sellers or any of their ERISA Affiliates are or have been obligated to contribute to at any time ("ERISA Affiliate Plan"); including any liability (A) to the Pension Benefit Guaranty Corporation under Title IV of ERISA; (B) relating to a multiemployer plan; (C) with respect to non-compliance with COBRA or HIPAA; (D) with respect to noncompliance with any other applicable provision of the Code, ERISA or any other applicable laws; or (E) with respect to any suit, proceeding or claim which is brought against the Buyer with respect to any such benefit plan or ERISA Affiliate Plan, against any such benefit plan or ERISA Affiliate Plan, or against any fiduciary or former fiduciary of any such benefit plan or ERISA Affiliate Plan; and (viii) BHE's obligations under the HQ Transmission Support Agreements (subject to the terms and conditions of the HQ Transfer Agreement). All such liabilities and obligations not being assumed pursuant to this Section 2.4 are herein called the "Excluded Liabilities." Subject to Section 9.2(f), the parties agree and acknowledge that the Sellers shall be entitled exclusively to control any litigation, administrative or regulatory proceeding, investigation or inquiry of any kind or nature arising out of or related to any Excluded Liabilities, and the Buyer agrees to promptly notify the Sellers of the actual or threatened commencement or occurrence of any of the foregoing and to cooperate fully with the Sellers in connection therewith (provided that Buyer's cooperation need not include the payment of money or any other financial accommodation). ARTICLE III PURCHASE PRICE -------------- 3.1 Purchase Price. Subject to the express provisions of this Agreement, -------------- the purchase price for the Purchased Assets shall consist of the Initial Payment and the Additional Payments 18 (collectively, the "Purchase Price"). The "Initial Payment" shall be an amount equal to the sum of (i) $89,000,000 and (ii) the Adjustment Amount. The "Additional Payments" shall consist of the payment by Buyer to BHE of $400,000 per year (or pro rata portion thereof) for the term of the HQ Transmission Support Agreements, to be payable as provided in the HQ Transfer Agreement. 3.2 Purchase Price Adjustment. ------------------------- (a) No later than five (5) Business Days before the Closing Date, BHE shall notify the Buyer in writing of the Estimated Adjustment Amount, which shall be payable by the Buyer to BHE as provided in Section 4.2. (b) Within thirty (30) days after the Closing, BHE shall prepare and deliver to the Buyer a statement (the "Adjustment Statement") which reflects (i) the net book value, as reflected on the books of the Sellers as of the Closing Date, of BHE's interest under the Wyman Agreements in the fuel inventory at Wyman Station (the "Inventory Adjustment Amount") and (ii) the Maintenance and Capital Expenditures Amount applicable to the Purchased Assets. The Inventory Adjustment Amount and the Maintenance and Capital Expenditures Amount are referred to collectively as the "Adjustment Amount." The Inventory Adjustment Amount will be based on an inventory survey conducted within five (5) Business Days prior to the Closing Date consistent with Sellers' current inventory procedures, and Buyer will be entitled to have a Buyer Representative observe such inventory survey. The Adjustment Statement shall be prepared using the same generally accepted accounting principles, policies and methods as the Sellers have historically used in connection with the calculation of the items reflected on the Adjustment Statement. The Buyer agrees to cooperate with BHE in connection with the preparation of the Adjustment Statement and related information and shall provide to BHE such books, records and information as may be reasonably requested from time to time. (c) The Buyer may dispute the Inventory Adjustment Amount or the Maintenance and Capital Expenditures Amount; provided, however, that the Buyer shall notify BHE in writing of the disputed amount, and the basis of such dispute, within ten (10) Business Days of the Buyer's receipt of the Adjustment Statement. In the event of a dispute with respect to any part of an Adjustment Amount, the Buyer and BHE shall attempt to reconcile their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties. If the Buyer and BHE are unable to reach a resolution of such differences within thirty (30) days of receipt by BHE of the Buyer's written notice of dispute, the Buyer and BHE shall submit the amounts remaining in dispute for determination and resolution to the Independent Accounting Firm, which shall be instructed to determine and report to the parties, within thirty (30) days after such submission, upon such remaining disputed amounts, and such report shall be final, binding and conclusive on the parties hereto with respect to the amounts disputed. The fees and disbursements of the Independent Accounting Firm shall be shared equally. (d) Within ten (10) Business Days after the Buyer's receipt of the Adjustment Statement, if the Adjustment Amount is less than the Estimated Adjustment Amount, the Sellers shall refund the difference to the Buyer, and if the Adjustment Amount is greater than the Estimated Adjustment Amount, the Buyer shall pay the difference to BHE on behalf of the 19 Sellers; provided, that if there is a dispute with respect to any amount on the Adjustment Statement, the Buyer shall immediately pay to BHE on behalf of the Sellers any undisputed amounts (to the extent not previously paid). Within five (5) Business Days after the final determination of any amounts on the Adjustment Statement, the Buyer shall pay to BHE on behalf of the Sellers an amount equal to (x) the Adjustment Amount as finally determined to be payable with respect to the Adjustment Statement less (y) the sum of the Estimated Adjustment Amount and any additional undisputed amount theretofore paid by the Buyer to the Sellers; provided, however, that if such amount shall be less than zero, then the Sellers will pay to the Buyer the amount by which such amount is less than zero. Any amount paid or refunded under this Section 3.2(d) shall be paid or refunded with interest for the period commencing on the Closing Date through the date of payment, calculated at the "prime rate" for domestic banks as published in The Wall Street Journal (Northeast Edition) in the "Money Rates" section on the Closing Date, in cash by Federal or other wire transfer of immediately available funds. 3.3 Allocation of Purchase Price. Each of the Buyer and the Sellers agree ---------------------------- to allocate the Purchase Price among the Purchased Assets in accordance with Schedule 3.3. Each of the Buyer and the Sellers agree to file Internal Revenue Service Form 8594 with their Federal Income Tax Returns for the taxable year that includes the Closing Date, and to file all Federal, state, local and foreign Tax Returns, each in accordance with the allocation of the Purchase Price among the tax categories of the Purchased Assets set forth above. Each of the Buyer and the Sellers shall report the transactions contemplated by this Agreement for Federal Income Tax and all other Tax purposes in a manner consistent with such allocation. Each of the Buyer and the Sellers agree to provide the others promptly with any other information and cooperation required to complete Form 8594. Each of the Buyer and the Sellers shall notify and provide the others with reasonable assistance in the event of an examination, audit or other proceeding regarding the agreed-upon allocation of the Purchase Price. 3.4 Proration. --------- (a) The Buyer and the Sellers agree that all of the items normally prorated, including those listed below, relating to the business and operation of the Purchased Assets will be prorated as of the Closing Date, with the Sellers liable with respect to Purchased Assets being sold by them to the extent such items relate to any time period through the Closing Date, and the Buyer liable to the extent such items relate to periods subsequent to the Closing Date with, to the extent practicable, a cash settlement on the Closing Date: (i) personal property and real estate taxes, assessments and other charges, if any, by the municipality, on the basis of the municipality's fiscal year, on or with respect to the business and operation of the Purchased Assets; (ii) rent, Taxes and other items payable by or to a Seller under any of the Sellers' Agreements assigned to and assumed by the Buyer hereunder which are associated with the Purchased Assets; (iii) any permit, license, registration, compliance assurance fees or other fees with respect to any Permit and Environmental Permit associated with the Purchased Assets; 20 (iv) sewer rents and charges for water, telephone, electricity and other utilities; and (v) fixed monthly charges to the NEPOOL. (b) In connection with the prorations referred to in (a) above, in the event that actual figures are not available at the Closing Date, the proration shall be based upon the actual Taxes or fees for the preceding year (or appropriate period) for which actual Taxes or fees are available and such Taxes or fees shall be reprorated upon request of the affected Sellers, on the one hand, or the Buyer, on the other hand, made within sixty (60) days after the date that the actual amounts become available. The Sellers and the Buyer agree to furnish each other with such documents and other records as may be reasonably requested in order to confirm all adjustment and proration calculations made pursuant to this Section 3.4. (c) To the extent required by any approval of the transfer of the FERC project licenses related to the Hydroelectric Assets, Sellers agree to pay all annual charges accrued under such licenses as of the Closing Date. 3.5 Exclusion of Purchased Assets from Closing. (a) In the event (i) any Purchased Asset cannot be conveyed on the Closing Date due to the failure on the part of Sellers to satisfy any condition in Article VIII (other than Section 8.1(c)) required on their part to be satisfied or (ii) the condition set forth in Section 8.1(c) is not satisfied (without regard to any qualifications with respect to Material Adverse Effect contained therein), then: (1) if the aggregate value of the Purchased Asset or group of Purchased Assets that are so affected equals 10% or more of the Purchase Price or if the exclusion of such asset(s) materially impairs the use of another Purchased Asset or a group of Purchased Assets as historically used the aggregate value of which equals 10% or more of the Purchase Price, then at Buyer's option, Buyer may (i) terminate this Agreement pursuant to Section 10.1(d) (provided that Buyer shall not be entitled to terminate this Agreement if the sole affected Purchased Asset is the Veazie Hydro Project), or (ii) proceed with the Closing and the Purchase Price shall be decreased by an amount equal to the aggregate value of such Purchased Asset or group of Purchased Assets so affected; or (2) if the aggregate value of the Purchased Asset or group of Purchased Assets that are so affected equals less than 10% of the Purchase Price or if the exclusion of such asset(s) materially impairs the use of another Purchased Asset or a group of Purchased Assets as historically used the aggregate value of which equals 10% or less of the Purchase Price, the Closing shall proceed and the Purchase Price shall be decreased by an amount equal to the aggregate value of the Purchased Asset or group of Purchased Assets so affected. (b) For purposes of this Section 3.5, the "value" of any asset shall be determined in accordance with the allocation of the Purchase Price as set forth on Schedule 3.3. In the case of such an adjustment to the Purchase Price, the Maintenance and Capital Expenditure Amount shall be reduced by the amounts thereof attributable to such assets. 21 (c) Notwithstanding Section 3.5(a)(1) above, Buyer agrees that in the event BHE is unable to convey its interest in Bangor-Pacific to Buyer at Closing for any reason, Buyer shall nevertheless proceed with the Closing and the Purchase Price shall be reduced by the amount allocated to BHE's interest in Bangor-Pacific as set forth on Schedule 3.3. ARTICLE IV THE CLOSING ----------- 4.1 Time and Place of Closing. Upon the terms and subject to the ------------------------- satisfaction of the conditions contained in Article VIII of this Agreement (the "Closing Conditions"), the Closing will take place at the offices of Winthrop, Stimson, Putnam & Roberts, New York, New York on such date as the parties may agree, which date shall be as soon as practicable, but, subject to Section 7.4 hereof, no later than five (5) Business Days following the date on which all of the Closing Conditions have been satisfied or waived; or at such other place or time as the parties may agree. 4.2 Payment of Purchase Price. Upon the terms and subject to the ------------------------- satisfaction (or waiver) of the conditions contained in this Agreement, in consideration of the aforesaid sale, assignment, conveyance, transfer and delivery of the Purchased Assets, the Buyer will pay or cause to be paid to BHE on behalf of the Sellers at the Closing an amount in United States dollars equal to the sum of (i) $89,000,000 (as adjusted, if so required, pursuant to the express provisions of this Agreement including without limitation Sections 3.5 and 7.10 hereof) and (ii) the Estimated Adjustment Amount (the "Preliminary Purchase Price"), by wire transfer of immediately available funds or by such other means as are agreed upon by BHE and the Buyer. The balance of the Initial Payment (or, alternatively, any amounts owing by the Sellers to Buyer), in each case determined in accordance with Section 3.2 hereof, shall be paid as provided in said Section 3.2. 4.3 Deliveries By Sellers. At the Closing, subject to the express --------------------- provisions of this Agreement including, without limitation, Sections 3.5 and 7.10 hereof, the appropriate Sellers will deliver the following to the Buyer: (a) Bill of Sale, duly executed by the Sellers, for the personal property included in the Purchased Assets; (b) All consents, waivers or approvals obtained by any of the Sellers with respect to the sale and purchase of the Purchased Assets or the consummation of the transactions related to the sale of the Purchased Assets, contemplated by this Agreement, to the extent specifically required hereunder; (c) Opinions of counsel and certificates (as contemplated by Section 8.2) with respect to the Purchased Assets; (d) One or more deeds of conveyance of the Real Estate included in the Purchased Assets to the Buyer, reserving the applicable Easements, without covenants or 22 warranty of title, duly executed and acknowledged by the appropriate Sellers and in recordable form, together with transfer tax declarations with respect to such conveyances; (e) FIRPTA Affidavits executed by the appropriate Sellers; (f) The Assignment and Assumption Agreement, duly executed by the appropriate Sellers, together with the attachment thereto relating to the Wyman Assets; (g) All such other instruments of assignment or conveyance as shall, in the reasonable opinion of the Buyer and its counsel, be necessary or desirable to transfer to the Buyer the Purchased Assets in accordance with this Agreement and, where necessary or desirable, in recordable form; (h) Each of the other Ancillary Agreements, duly executed by the appropriate Sellers and, in the case of the Separation Document, the HQ Transfer Agreement and the Transitional Power Sales Agreement, in a form mutually satisfactory to BHE and Buyer; (i) A copy of the resolutions of the Board of Directors of each of the Sellers authorizing and approving this Agreement and each of the Ancillary Agreements to which such Seller is a party and the consummation of the transactions contemplated hereby and thereby, in each case certified by the secretary of the respective Seller; (j) Certificates by the secretary of each Seller as to the incumbency of each person executing this Agreement or any Ancillary Agreement on behalf of such Seller; and (k) Such other agreements, documents, instruments and writings as are required to be delivered by any of the Sellers at or prior to the Closing Date pursuant to this Agreement or otherwise required in connection herewith. 4.4 Deliveries by the Buyer. At the Closing, subject to the express ----------------------- provisions of this Agreement including, without limitation, Sections 3.5 and 7.10, the Buyer will deliver the following to the appropriate Sellers: (a) The Preliminary Purchase Price, by wire transfer of immediately available funds or such other means as are agreed upon by BHE and the Buyer; (b) An opinion of counsel and certificate (as contemplated by Section 8.3) with respect to the Purchased Assets; (c) The Assignment and Assumption Agreement, duly executed by the Buyer, together with the attachment thereto relating to the Wyman Assets; (d) All such other instruments of assumption as shall, in the reasonable opinion of any Seller and its counsel, be necessary or desirable for the Buyer to assume the Assumed Liabilities related to the Purchased Assets being sold by such Seller in accordance with this Agreement; 23 (e) Each of the Ancillary Agreements, duly executed by the Buyer and, in the case of the Separation Document, the HQ Transfer Agreement and the Transitional Power Sales Agreement, in a form mutually satisfactory to BHE and Buyer; and (f) Such other agreements, documents, instruments and writings as are required to be delivered by the Buyer at or prior to the Closing Date pursuant to this Agreement or otherwise required in connection herewith. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SELLERS --------------------------------------------- The Sellers represent and warrant to the Buyer as follows as of the date hereof and as of the Closing Date: 5.1 Organization; Authority. Each Seller is a corporation duly organized, ----------------------- validly existing and in good standing under the laws of the State of Maine and has all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as is now being conducted. 5.2 Authority Relative to This Agreement. Each Seller has full corporate ------------------------------------ power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action required on the part of each Seller. This Agreement has been duly and validly executed and delivered by each Seller, and, assuming the accuracy of the Buyer's representations and warranties contained in Section 6.2, and subject to the receipt of the Seller Required Regulatory Approvals, the Seller Required Consents and the Buyer Required Regulatory Approvals, constitutes a valid and binding agreement of each Seller, enforceable against the Sellers in accordance with their terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally or general principles of equity. The Ancillary Agreements, when executed, will, assuming the accuracy of the Buyer's representations and warranties contained in Section 6.2, and subject to the receipt of the Seller Required Regulatory Approvals, the Seller Required Consents and the Buyer Required Regulatory Approvals, constitute valid and binding obligations of each Seller party thereto, enforceable against such Seller in accordance with their terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally or general principles of equity. 5.3 Consents and Approvals; No Violation. ------------------------------------ (a) Except for obtaining the Seller Required Consents and as otherwise set forth in Schedule 1.1(a)(53), and other than obtaining the Seller Required Regulatory Approvals and the Buyer Required Regulatory Approvals, neither the execution and delivery of this Agreement or the Ancillary Agreements by the Sellers nor the sale by the Sellers of the Purchased Assets 24 pursuant to this Agreement or the performance by each Seller of its respective other obligations under this Agreement and the Ancillary Agreements to which such Seller is a party will (i) conflict with or result in any breach of any provision of the Articles of Incorporation or Bylaws of any Seller, each as amended or restated; (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which any Seller is a party or by which any Seller or any of the Purchased Assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been or by the Closing Date will be obtained or which, in the aggregate, would not have a Material Adverse Effect; or (iii) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority or other Person, except where the failure to fulfill such requirement would not result in a Material Adverse Effect; or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to any Seller, or any of its assets, which violation would have a Material Adverse Effect. (b) Except as set forth in Schedule 5.12 and except for (i) any approvals under the Federal Power Act required to convey the Purchased Assets to Buyer and to reassign the MEPCO Reservation to Buyer in accordance with the MEPCO Confirmation Agreement, (ii) any approvals required under Title 35-A of the Maine Revised Statutes or otherwise from the MPUC, (iii) the approval, if required, of the SEC pursuant to the Holding Company Act, (iv) the filings by the Sellers and the Buyer required by the HSR Act and the expiration or earlier termination of all waiting periods under the HSR Act, and (v) any approval required of the Maine Department of Environmental Protection ("MDEP"), the United States Environmental Protection Agency ("EPA"), or other governmental agency pursuant to any Environmental Law (the filings and approvals referred to in Schedule 5.12 and clauses (i) through (v) are collectively referred to as the "Seller Required Regulatory Approvals"), no declaration, filing or registration with, or notice to, or authorization, consent or approval of any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by the Sellers or the consummation by the Sellers of the transactions contemplated hereby or by the Ancillary Agreements, other than such declarations, filings, registrations, notices, authorizations, consents or approvals (x) which become applicable to the Sellers or the Purchased Assets as a result of the specific regulatory status of the Buyer (or any of its Affiliates) or as a result of any other facts that specifically relate to the business or activities in which the Buyer (or any of its Affiliates) is or proposes to be engaged or which are identified herein as Buyer Required Regulatory Approvals or (y) which, if not obtained or made, will not, individually or in the aggregate, have a Material Adverse Effect. 5.4 Title and Related Matters. Except as set forth in Schedule 5.4 and ------------------------- except for those Permitted Encumbrances which are permitted by definition to survive the Closing Date, (i) BHE shall have, and shall convey to Buyer, good, valid and marketable record title, insurable as such by the Title Insurance Company at Buyer's sole cost and expense, to each of the Purchased Assets constituting Real Estate as specified in the Title Commitments, and (ii) each Seller shall have, and shall convey to Buyer, good, valid and marketable title to the other Purchased Assets which it purports to own (other than those which have been disposed of since the date hereof in the ordinary course of business), free and clear of all Encumbrances. Except as set forth in Schedule 5.4, BHE is in possession of each of the Purchased Assets constituting Real Estate and 25 there are no third party licensees or tenants at the sites of the Real Estate. Sellers have valid and subsisting leasehold estates and the right to quiet enjoyment of the Real Estate subject to real property leases for the full term thereof and each such lease is a legal, valid and binding agreement, enforceable against the respective Seller in accordance with its terms and there is no default of Sellers (or any condition or event which, after notice or lapse of time or both, would constitute a default of Sellers) thereunder. 5.5 Environmental Matters. Except as disclosed in Schedule 5.5: --------------------- (a) The Sellers hold, and are in compliance with, all permits, licenses and governmental authorizations ("Environmental Permits") required for Sellers to conduct, as now conducted, the Business with respect to the Purchased Assets under applicable Environmental Laws, and the Sellers have not received any written notice (or otherwise have Knowledge) of any violation of any Environmental Law that is presently applicable to the Purchased Assets or the related Business. (b) The Sellers have not received any written request for information, or been notified (or otherwise have Knowledge) that any Seller is a potentially responsible party, under CERCLA or any similar state law with respect to any on-site location included within the Purchased Assets or in connection with any off-site location used by Sellers in connection with any Purchased Asset. (c) The Sellers have not entered into or agreed to any consent decree or order, and are not subject to any judgment, decree, or judicial order, with respect to any of the Purchased Assets or the related Business relating to compliance with any Environmental Law or to investigation or cleanup of Hazardous Substances under any Environmental Law. (d) To their Knowledge, Sellers have provided Buyer with (i) a list of all facilities that have been used during the course of the operations of any of the Purchased Assets for the treatment, storage, recycling or disposal of any Hazardous Substances; (ii) a list of all material environmental reports and/or audits which discuss the environmental conditions of the Purchased Assets; and (iii) a list of all underground storage tanks and/or surface impoundments located on the Purchased Assets which contain or have contained Hazardous Substances. 5.6 Labor Matters. The Collective Bargaining Agreement is the only ------------- collective bargaining agreement to which any Seller is a party or is subject and which relates to the ownership, operation or maintenance of the Purchased Assets. Solely (in each of the following clauses (a) through (f)) with respect to the business or operations of the Purchased Assets or the Purchased Assets Employees, except to the extent set forth in Schedule 5.6 (except for such matters as will not have a Material Adverse Effect or are not included in the Assumed Liabilities), (a) the Sellers are in compliance with the Collective Bargaining Agreement and all applicable laws respecting employment and employment practices, terms and conditions of employment, collective bargaining and wages and hours; (b) the Sellers have not received written notice (or otherwise have Knowledge) of any unfair labor practice complaint against any Seller pending before the National Labor Relations Board; (c) there is no labor strike, slowdown 26 or stoppage actually pending or, to Sellers' Knowledge, threatened against or affecting any Seller or the Purchased Assets; (d) the Sellers have not received notice (or otherwise have Knowledge) that a representation petition respecting the employees of any Seller has been filed with the National Labor Relations Board; (e) no arbitration proceeding arising out of or under the Collective Bargaining Agreement is pending against any Seller; and (f) there are no administrative charges or court complaints against the Sellers concerning alleged employment discrimination or other employment related matters pending or, to Sellers' Knowledge, threatened before the U.S. Equal Employment Opportunity Commission or any other governmental or regulatory body or authority. The Sellers are not in violation of the WARN Act. 5.7 ERISA; Benefit Plans. Schedule 5.7 provides summary descriptions of -------------------- all deferred compensation, pension, profit-sharing, incentive and retirement plans, and all material bonus and other employee benefit or fringe benefit plans, maintained or with respect to which the Sellers have provided compensation and/or benefits to the Purchased Assets Employees. As to all qualified plans which Sellers maintain: (a) they are qualified under Code Sections 401(a) and 501(a) and have current Internal Revenue Service determination letters; (b) they are currently in compliance in form and operation with Code and Treasury Regulation requirements; (c) all required contributions have been made in a timely manner and funding is adequate for terminations resulting from the sale of the Purchased Assets; (d) there are no pending or, to Sellers' Knowledge, threatened claims against any such plans or Sellers or otherwise, which allege violations of law which could result in liability on the part of the Buyer; and as to all terminated qualified retirement plans which a Seller has maintained, participants' rights have been fully satisfied; and (e) neither of the Sellers nor any entity required to be aggregated therewith pursuant to Section 414(b) or (c) of the Code and/or Section 4001(b) of ERISA has incurred or could reasonably be expected to incur any material liability under Title IV of ERISA and/or Section 412 of the Code (other than for the payment of benefits or Pension Benefit Guaranty Corporation insurance premiums, in each case payable in the ordinary course). 5.8 Real Estate. Schedule 5.8 identifies the deeds or other instruments ----------- evidencing BHE's title to the real property rights owned or leased by BHE as lessor or as lessee (or as to which BHE holds easements or other rights) and included in the Purchased Assets (other than the 345 Line ROWs, as to which Annex I to Schedule 5.8 references the relevant tax parcels), as well as certain real property owned by BHE which on the date hereof is associated with certain of the Hydroelectric Facilities but is not included within the Purchased Assets. The portions of the real property rights, including rights to flood and flow, described in such deeds and other instruments that constitute Purchased Assets and the 345 Line ROWs are collectively referred to herein as the "Real Estate." Schedule 5.8 also describes certain Encumbrances on the Real 27 Estate of which Sellers have Knowledge. Subject to change in applicable law or regulation, or interpretation thereof, and events beyond the control of Sellers, no fee ownership, lease, right of way, easement, license or other right in real property, other than the Real Estate, is necessary for the Buyer to own, operate or maintain the Purchased Assets substantially as historically owned, operated and maintained by the Sellers. To Sellers' Knowledge, none of the improvements on any of the Real Estate, including, without limitation the Easements, nor any appurtenances thereto or equipment therein nor the operation or maintenance thereof, violate any restrictive covenant or the terms, conditions or restrictions of any easement. All Real Estate (other than the 345 Line ROWs) will have access, directly or indirectly through an easement under which Buyer shall have adequate rights, to a public road. To the extent that zoning laws apply, each parcel of Real Estate (other than the 345 Line ROWs) is zoned for its current use. Copies of all surveys, title insurance policies or real estate leases in the possession of the Sellers related to the Real Estate have been delivered or made available to the Buyer. 5.9 Condemnation. Except as set forth in Schedule 5.9, BHE has received ------------ no written notice or otherwise has Knowledge that any part of the Real Estate or any other real property or rights leased, used or occupied by BHE in connection with the ownership, operation or maintenance of the Purchased Assets is subject to any pending or threatened suit for condemnation or other taking by any public authority. 5.10 Certain Contracts and Arrangements. ---------------------------------- (a) Except (i) as listed in Schedule 5.10 and (ii) for agreements entered into with Buyer's consent under Section 7.1, the Sellers are not a party to any contract, agreement, personal property lease, commitment, understanding or instrument which relates to the Purchased Assets or the ownership, operation or maintenance of the Purchased Assets and which is included in the Assumed Liabilities. Complete and accurate copies of all Sellers' Agreements, together with all amendments and supplements, have been delivered or made available to the Buyer prior to the execution of this Agreement. (b) Except in set forth in Schedule 5.10, each Sellers' Agreement (i) constitutes a valid and binding obligation of each Seller which is a party thereto enforceable against such Seller in accordance with its terms, (ii) is in full force and effect, and (iii) except as disclosed in Schedule 5.10 may be transferred to the Buyer pursuant to this Agreement without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder. (c) Except as set forth in Schedule 5.10, there is not, under any of the Sellers' Agreements, any default or event which, with notice or lapse of time or both, would constitute a default on the part of a Seller or, to Sellers' Knowledge, any other party thereto, except such events of default and other events as to which requisite waivers or consents have been obtained, or which would not, in the aggregate, have a Material Adverse Effect. (d) The Purchased Assets are, and as of the Closing Date will be, inclusive of all facilities and equipment in such condition as will be sufficient for Buyer to comply with its obligations under the Interconnection Agreement after giving effect to the Separation Document. 28 5.11 Legal Proceedings. Except as set forth in Schedule 5.11 and except ----------------- for matters which are Excluded Liabilities, there are no claims, actions, proceedings or investigations pending or, to Sellers' Knowledge, threatened against or relating to the Sellers and pertaining to the Purchased Assets before any court, governmental or regulatory authority or body acting in an adjudicative capacity. Except as set forth in Schedule 5.11 and except for matters which are Excluded Liabilities, no Seller is subject to any outstanding judgment, rule, order, writ, injunction or decree of any court, governmental or regulatory authority pertaining to the Purchased Assets or the related Business. 5.12 Permits. ------- (a) "Permits" means all material permits, licenses, franchises and other governmental authorizations, consents and approvals relating to the Purchased Assets or the ownership, operation or maintenance of the Purchased Assets, other than those permits required pursuant to Environmental Laws. Except as set forth in Schedule 5.12, the Sellers have all Permits necessary to own, operate and maintain the Purchased Assets as presently owned, and operated, except where the failure to have any such permit would not have a Material Adverse Effect. Except as set forth in Schedule 5.12, the Sellers have not received any written notification that any Seller is in violation of any of such Permit, or any law, statute, order, rule, regulation, ordinance or judgment of any governmental or regulatory body or authority applicable to it and pertaining to the Purchased Assets or the related Business. Except as set forth in Schedule 5.12, to their Knowledge, the Sellers are in compliance with all Permits, laws, statutes, orders, rules, regulations, ordinances, or judgments of any governmental or regulatory body or authority applicable to them or the Purchased Assets or the related Business except for violations which, individually or in the aggregate, do not have a Material Adverse Effect. (b) Schedule 5.12 sets forth all Permits and Environmental Permits including Permits and Environmental Permits which, if not held or maintained (individually or in the aggregate) could reasonably be expected to impair the Buyer's conduct of the Business with respect to the Purchased Assets. Copies of all such permits listed on Schedule 5.12 have been provided or made available to the Buyer prior to the execution of this Agreement. 5.13 Taxes. ----- (a) With respect to the Purchased Assets and the business of the Sellers associated therewith, (i) all Tax Returns of Sellers required to be filed have been timely filed and are true, correct and complete, and (ii) all Taxes, including those shown to be due on such Tax Returns, have been timely paid. Except as set forth in Schedule 5.13, (i) no notice of deficiency or assessment has been received from any taxing authority with respect to liabilities for Taxes of the Sellers in respect of the Purchased Assets and the business of the Sellers associated therewith (nor has any such taxing authority threatened to issue such notice or assessment), that have not been fully paid or finally settled, and any such deficiency shown in such Schedule 5.13 is being contested in good faith through appropriate proceedings, (ii) there are no outstanding agreements or waivers extending the applicable statutory periods of limitation for Taxes of the Sellers associated with the Purchased Assets for any period, (iii) none of the Purchased Assets is "tax-exempt use property" within the meaning of Section 168(h) of the Code or tax-exempt bond financed property within the meaning of Section 168(g)(5) of the Code and none of the 29 Purchased Assets is subject to any lease made pursuant to Section 168(f)(8) of the Code and (iv) there are no Encumbrances for Taxes on the Purchased Assets that are not Permitted Encumbrances. There are no proceedings pending for the reduction of, and Sellers have no Knowledge of any contemplated increase in, the assessed valuation of the Real Estate or the other Purchased Assets. (b) With respect to Bangor-Pacific: (i) all Tax Returns have been timely filed, and are true, correct and complete in all material respects; (ii) all Taxes, including those shown to be due on such Tax Returns have been paid; (iii) all Taxes that Bangor-Pacific is required by law to withhold and collect have been withheld and collected and timely paid over to the appropriate governmental authorities; (iv) except to the extent set forth in Schedule 5.13, no Tax audits or other administrative proceedings are presently pending or proposed or to Sellers' Knowledge threatened (in each case in writing) with regard to any Taxes or Tax Returns of Bangor-Pacific; (v) except to the extent set forth in Schedule 5.13, there are no Encumbrances for Taxes on any property or assets of Bangor-Pacific other than Permitted Encumbrances; (vi) all deficiencies of Taxes asserted in writing or otherwise asserted with respect to Bangor-Pacific as a result of an audit, examination, investigation or similar proceeding have been paid or are being contested in good faith through appropriate proceedings, with adequate reserves booked for any adverse determination; (vii) there are no powers of attorney in effect relating to Taxes of Bangor-Pacific that relate to Taxes for any post-Closing period; (viii) except as set forth in Schedule 5.13, there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any items of Tax of Bangor-Pacific, and Bangor- Pacific has not requested any extension of time within which to file any Tax Return that has not yet been filed; (ix) Bangor-Pacific is and has been since its date of inception properly treated as a partnership, and not as an association taxable as a corporation, for United States federal income and applicable state and local tax purposes; and (x) there are no agreements now, and there have been no agreements in the past, providing for allocations of income or losses, distributions of cash, of Bangor-Pacific other than as set forth in the West Enfield Joint Venture Agreement. 30 (xi) there are no proceedings pending for the reduction of, and Sellers have no Knowledge of any contemplated increase in, the assessed valuation of the real property or the other assets of Bangor-Pacific. 5.14 Representations Regarding Bangor-Pacific. ---------------------------------------- (a) PHC is a wholly-owned subsidiary of BHE. (b) PHC owns a 50% partnership interest (the "Bangor-Pacific Interest") in Bangor-Pacific Hydro Associates ("Bangor-Pacific," which term, for purposes of Sections 5.13 and 5.14 and as the context contemplates, shall include Bangor Pacific Operating Co.). Bangor-Pacific is the owner of (i) the West Enfield Hydro Project and the Power Purchase Agreement dated June 9, 1986 between BHE and Bangor-Pacific (as successor to West Enfield Associates) and (ii) 100% of the issued and outstanding stock of Bangor-Pacific Operating Co., Inc., a Maine corporation and the operator of the West Enfield Hydro Project ("Bangor-Pacific Operating Co."). The Bangor-Pacific Interest and the 50% partnership interest held by Ogden Power Corporation represent all of the outstanding partnership interests in Bangor-Pacific. Except as set forth in Schedule 5.14, there are no outstanding options, rights, agreements, convertible or exchangeable securities or other commitments (other than this Agreement) (i) pursuant to which Bangor-Pacific, PHC or BHE is or may become obligated to issue, sell, purchase, return or redeem any partnership interests in Bangor- Pacific or (ii) that give any person the right to receive any benefits or rights similar to holders of partnership interests in Bangor-Pacific. Sellers have made available to the Buyer, with respect to Bangor- Pacific, an audited balance sheet for the period ending December 31, 1997 and an unaudited balance sheet for the period ended June 30, 1998; such balance sheets present fairly in all material respects the financial position of Bangor-Pacific as at such dates in accordance with generally accepted accounting principles. Except to the extent disclosed in the balance sheet described above, Bangor-Pacific has no liability, debt, commitment or obligation of any kind which, in accordance with generally accepted accounting principles, should be provided for or disclosed in a footnote to such balance sheet. Except (i) as set forth in Schedule 5.14 and (ii) as otherwise contemplated by this Agreement, since the date of the June 30, 1998 balance sheet for Bangor-Pacific, there has not been (a) any material adverse change in or effect on the business or operations of Bangor-Pacific; (b) any damage, destruction or casualty loss which is material to the business or operations of Bangor-Pacific; or (c) any entry into any agreement, commitment or transaction (including, without limitation, any borrowing, capital expenditure or capital financing) which relates to the business or operations of Bangor-Pacific or its assets, except agreements, commitments or transactions in the ordinary course of business and cancellable upon 30 days' notice without premium or penalty or as contemplated herein. (c) Except as set forth in Schedule 5.14 (which items disclosed therein, to the Knowledge of Sellers, do not render title to the Purchased Assets unmarketable or prevent adequate access to the Purchased Assets to which they relate, or materially interfere with the 31 continuing ownership, use, operation or maintenance of such assets consistent with historical practice or materially detract from the Business) and except for Permitted Encumbrances, (i) Bangor-Pacific has good and marketable record title to the real estate purported to be owned by it, and to the other assets which it purports to own (other than those which have been disposed of since the date hereof in the ordinary course of business), free and clear of all Encumbrances, and (ii) neither the whole nor any part of the real estate owned, leased, used or occupied by Bangor-Pacific is subject to any pending suit for condemnation or other taking by any public authority and, to Sellers' Knowledge, no such condemnation or other taking has been threatened. (d) Schedule 5.14 lists all real property leases to which Bangor- Pacific is a lessee or lessor and which provide for annual payments of more than $100,000 or are otherwise material to the business or operations of Bangor- Pacific. Except as set forth in Schedule 5.14, all such leases are valid, binding and enforceable in accordance with their terms, are in full force and effect and there are no existing defaults by Bangor-Pacific or any other party thereto thereunder. (e) Except as set forth in Schedule 5.14, (i) Bangor-Pacific holds all Environmental Permits required for Bangor-Pacific to conduct, as now conducted, the business and operations of Bangor-Pacific under applicable Environmental Laws, and, to the Knowledge of Sellers, Bangor-Pacific has not received any written notice (nor do Sellers otherwise have Knowledge) of any violation by Bangor-Pacific of any Environmental Law, (ii) Bangor-Pacific has not received any written request for information, or been notified (nor do Sellers otherwise have Knowledge) that Bangor-Pacific is a potentially responsible party, under CERCLA or any similar state law with respect to any on-site location of Bangor- Pacific included within the Purchased Assets, and (iii) Bangor-Pacific has not entered into or agreed to any consent decree or order, nor is Bangor-Pacific subject to any judgment, decree, or judicial order with respect to any of its assets or relating to compliance with any Environmental Law or to investigation or cleanup of Hazardous Substances under any Environmental Law. (f) Except as set forth in Schedule 5.14, Bangor-Pacific has no employees and Bangor-Pacific has no or has had no "employee pension benefit plan" (as defined in Section 3(2) of ERISA) or "employee welfare benefit plans" (as defined in Section 3(l) of ERISA) or any post-retirement benefit plans. (g) Except (i) as listed in Schedule 5.14, (ii) for contracts, agreements, personal property leases, commitments, understandings or instruments which will expire prior to the Closing Date or (iii) for agreements with suppliers entered into in the ordinary course of business, Bangor-Pacific is not a party to any written contract, agreement, personal property lease, commitment, understanding or instrument which relates to the ownership or operation of Bangor-Pacific or its assets. Each agreement referenced in this Section 5.14(g) to which Bangor-Pacific is a party and which is material to the Purchased Assets (i) constitutes a valid and binding obligation of Bangor-Pacific and (ii) is, or at the Closing will be, in full force and effect. Except as set forth in Schedule 5.14, there is not, under any of the agreements listed in such Schedule, any default or event which, with notice or lapse of time or both, would constitute a default on the part of Bangor-Pacific or, to Sellers' Knowledge, any other party thereto except such events of default and other events as to which requisite waivers or consent have been obtained, or which would not, in the aggregate, have a Material Adverse Effect. 32 (h) Except as set forth in Schedule 5.14 and except for matters which are Excluded Liabilities, there are no claims, actions, proceedings or investigations pending or, to Sellers' Knowledge, threatened against or relating to the business or operations of Bangor-Pacific or its assets before any court, governmental or regulatory authority or body acting in an adjudicative capacity. Except as set forth in Schedule 5.14 and except for matters which are Excluded Liabilities, neither Bangor-Pacific nor its assets is subject to any outstanding judgment, rule, order, writ, injunction or decree of any court, governmental or regulatory authority. (i) Bangor-Pacific has all permits, licenses, franchises and other governmental authorizations, consents and approvals (other than those permits required pursuant to Environmental Laws) (collectively "BP Permits") necessary to own and operate its business as presently owned and operated, except where the failure to have any such permit would not have a Material Adverse Effect. Except as set forth in Schedule 5.14, (i) Bangor-Pacific has not received any written notification that it is in violation of any of such BP Permit, or any law, statute, order, rule, regulation, ordinance or judgment of any governmental or regulatory body or authority applicable to it, (ii) to Sellers' Knowledge, Bangor-Pacific is in compliance with all BP Permits, laws, statutes, orders, rules, regulations, ordinances, or judgment of any governmental or regulatory body or authority applicable to it and (iii) the validity of the BP Permits will not be affected by the execution of this Agreement or the Ancillary Agreements or the consummation of the transactions contemplated hereby or thereby. Schedule 5.12 sets forth all Permits and Environmental Permits held by Bangor- Pacific, which, if not held or maintained (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect, copies of all of which have been provided or made available to the Buyer prior to the execution of this Agreement. 5.15 Representations Regarding Wyman Unit No. 4. BHE is the record and ------------------------------------------ beneficial owner of an 8.33% joint ownership interest in common (the "Wyman 4 Interest") in Wyman Unit No. 4, free and clear of all Encumbrances except Permitted Encumbrances. BHE has provided to the Buyer a copy of the governing documents related to the Wyman 4 Interest, each of which is listed on Schedule 5.10. There are no outstanding options, rights, agreements, convertible or exchangeable securities or other commitments (other than this Agreement) (i) pursuant to which BHE is or may become obligated to sell or purchase any joint ownership interests in Wyman Unit No. 4 or (ii) that give any person other than BHE the right to receive any of the benefits or rights of the Wyman 4 Interest. 5.16 Insurance. Except as set forth in Schedule 5.16, all policies of --------- fire, liability, worker's compensation and other forms of insurance owned or held by Sellers and insuring the Purchased Assets or the Business are in full force and effect, all premiums with respect thereto covering all periods up to and including the date as of which this representation is being made have been paid (other than retroactive premiums which may be payable with respect to comprehensive general liability and worker's compensation insurance policies), and no notice of cancellation or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation. Except as set forth in Schedule 5.16, Sellers have not been refused any insurance with respect to the Purchased Assets or the Business nor has their coverage been limited by any insurance carrier to which they have applied for any such insurance or with which they have carried insurance during the last twelve months. 33 5.17 Personal Property Included in Purchased Assets. No personal property ---------------------------------------------- of Sellers used or held for use in connection with any Purchased Asset as of the Bid Date but not included in the Purchased Assets or transferred to Buyer at Closing is necessary for Buyer to own, operate or maintain the Purchased Assets substantially as historically owned, operated and maintained by the Sellers. 5.18 Intellectual Property Rights. Schedule 5.18 discloses all trade ---------------------------- secrets, patents and patentable rights used or held for use or necessary in connection with the Purchased Assets and the related Business ("Intellectual Property"), all of which Sellers either have all right, title and interest in or a valid and binding irrevocable, non-royalty bearing, right under contract to use without limitation. There are no trademarks, tradenames, service marks, service names, inventions, copyrights, or rights related to any of the foregoing, know-how or applications for and registrations of patents, trademarks, service marks and copyrights ("Other Intellectual Property") used, held for use or necessary in connection with the Purchased Assets and the related Business. Sellers have not received notice (or otherwise have Knowledge) that Sellers are infringing upon any Intellectual Property or Other Intellectual Property of any other Person in connection with the Purchased Assets or the related Business. 5.19 Financial Statements. BHE has made available to the Buyer its -------------------- audited consolidated balance sheet as of December 31, 1997 (the "Audited Balance Sheet"), and its unaudited consolidated balance sheet as of June 30, 1998 (the "Unaudited Balance Sheet"). The Audited Balance Sheet (including the related notes thereto) presents fairly, in all material respects, the consolidated financial position of the Sellers as of its date in conformity with generally accepted accounting principles applied on a consistent basis, except as otherwise noted therein. The Unaudited Balance Sheet (including the notes thereto) presents fairly, in all material respects, the consolidated financial position of the Sellers as of its date in conformity with generally accepted accounting principles applied on a consistent basis except as otherwise noted therein. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE V, THE PURCHASED ASSETS ARE BEING SOLD AND TRANSFERRED "AS IS, WHERE IS", AND THE SELLERS ARE NOT MAKING ANY OTHER REPRESENTATIONS OR WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, CONCERNING SUCH PURCHASED ASSETS, INCLUDING, IN PARTICULAR, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ALL OF WHICH ARE HEREBY EXPRESSLY EXCLUDED AND DISCLAIMED. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BUYER ------------------------------------------- The Buyer represents and warrants to the Sellers, as of the date hereof and as of the Closing Date, as follows: 6.1 Organization. The Buyer is a corporation duly organized, validly ------------ existing and in good standing under the laws of the Commonwealth of Pennsylvania and has all requisite 34 corporate power and authority to own, lease, and operate its properties and to carry on its business as is now being conducted. The Buyer has heretofore delivered to BHE complete and correct copies of its Certificate of Incorporation and Bylaws (or other similar governing documents), and any amendments thereto, as currently in effect. 6.2 Authority Relative to This Agreement. The Buyer has full corporate ------------------------------------ power and authority to execute and deliver this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Buyer, and no other corporate proceedings on the part of the Buyer are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Buyer, and assuming the accuracy of Sellers' representations and warranties contained in Section 5.2, and subject to the receipt of the Buyer Required Regulatory Approvals, the Seller Required Consents and the Seller Required Regulatory Approvals, this Agreement constitutes a valid and binding agreement of the Buyer, enforceable against the Buyer in accordance with its terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally or general principles of equity. The Ancillary Agreements, when executed, will, assuming the accuracy of Sellers' representations and warranties contained in Section 5.2, and subject to the receipt of the Buyer Required Regulatory Approvals, the Seller Required Consents and the Seller Required Regulatory Approvals, constitute valid and binding agreements of Buyer, enforceable against the Buyer in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally or general principles of equity. 6.3 Consents and Approvals; No Violation. ------------------------------------ (a) Except as set forth in Schedule 6.3, and other than obtaining the Buyer Required Regulatory Approvals, the Seller Required Consents and the Seller Required Regulatory Approvals, neither the execution and delivery of this Agreement or the Ancillary Agreements by the Buyer nor the purchase by the Buyer of the Purchased Assets pursuant to this Agreement and the Ancillary Agreements will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or Bylaws (or other similar governing documents) of the Buyer, (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, or (iii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement, lease or other instrument or obligation to which the Buyer or any of its subsidiaries is a party or by which any of its assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained, or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Buyer, and any assets of Buyer. (b) Except for (i) authorizations under Part II of the Federal Power Act required (A) to implement sales under any wholesale sales agreements to be assigned to the Buyer, (B) to acquire, own and operate the jurisdictional Purchased Assets and (C) to sell electricity from the 35 Purchased Assets at wholesale market-based rates, (ii) approval by the FERC, under Part I of the Federal Power Act, of the transfer of the FERC project licenses related to, and necessary to operate, the Hydroelectric Assets, (iii) any MPUC approval necessary for the Sellers to transfer the Purchased Assets in Maine and/or for the Buyer to purchase the Purchased Assets in Maine, and to obtain exempt wholesale generator certification with respect to the Purchased Assets, (iv) the filing by the Buyer and the Sellers required by the HSR Act and the expiration or earlier termination of all waiting periods under the HSR Act, (v) any approval required of the MDEP, the EPA, or other governmental agency pursuant to any Environmental Law, (vi) the acceptance/approval by FERC of the Interconnection Agreement and the Transitional Power Sales Agreement, (vii) certification of Buyer as an exempt wholesale generator pursuant to Section 32 of the Holding Company Act with respect to the Purchased Assets (excluding approvals for sales to Affiliates), (viii) any authorizations or approvals of FERC required to be obtained by Buyer in connection with the HQ Agreements, and (ix) any authorizations or approvals of the SEC or FERC required for Buyer to acquire, own and operate the Purchased Assets without causing Buyer's parent, PP&L Resources, Inc., to become subject to registration under the Holding Company Act (the filings and approvals referred to in clauses (i) through (ix) are collectively referred to as the "Buyer Required Regulatory Approvals"), no declaration, filing or registration with, or notice to, or authorization, consent or approval of any governmental or regulatory body or authority is necessary for the consummation by the Buyer of the transactions contemplated hereby or by the Ancillary Agreements. 6.4 Regulation as a Utility. The Buyer is not and, except as a ----------------------- consequence of the transactions and regulatory approvals contemplated by this Agreement, at the Closing Date will not be, subject to regulation as a public utility or public service company (or similar designation) by the United States, any state of the United States, any foreign country or any municipality or any political subdivision of the foregoing. The Buyer is an Affiliate of a public utility holding company exempt from registration under the Holding Company Act. 6.5 Availability of Funds. The Buyer has sufficient funds available to it --------------------- to pay the Purchase Price on the Closing Date in accordance with Section 4.2. 6.6 Litigation. There is no pending or, to Buyer's Knowledge, threatened ----------- action, by any governmental authority, arbitration panel or third Person which is likely to result, or has resulted, in (a) the institution of legal proceedings to prohibit or restrain the performance of this Agreement, the Equity Contribution Agreement, or any of the Ancillary Agreements, or the consummation of the transactions contemplated thereby in any material respect, or (b) a claim for damages as a result of this Agreement, the Equity Contribution Agreement, or any of the Ancillary Agreements, or the consummation of the transactions contemplated thereby. There is no pending or, to Buyer's Knowledge, threatened litigation or proceeding, private or governmental, against Buyer which is likely to have a material adverse effect on Buyer. 6.7 Qualified Buyer. To Buyer's Knowledge, Buyer is not ineligible under ---------------- applicable law or regulation from obtaining any Permits necessary for the Buyer to own and operate the Purchased Assets as of the Closing to the extent such operation is either required by any Ancillary Agreement or is contemplated by the Buyer. 36 6.8 Title Policy Commitment. Within one hundred and twenty (120) days ------------------------ after the date of this Agreement, the Buyer shall, at its own cost and expense, obtain and provide the Sellers with copies of, title policy commitments (the "Title Commitments") issued by the Title Insurance Company with respect to the Real Estate. 6.9 "AS IS" Sale. Buyer acknowledges that the representations and ------------- warranties set forth in this Agreement, the Ancillary Agreements and any certificates delivered by Sellers in connection herewith or therewith constitute the sole and exclusive representations and warranties of the Seller in connection with the transactions contemplated hereby. There are no representations, warranties, covenants, understandings or agreements among the parties regarding the Purchased Assets or their transfer other than those incorporated or referred to in this Agreement or the Ancillary Agreements. Except for the representations and warranties set forth in this Agreement, the Ancillary Agreements and any certificates delivered by Sellers in connection herewith or therewith, Buyer disclaims reliance on any representations, warranties or guarantees, either express or implied, by Sellers. 6.10 Buyer's Affiliate. If Buyer elects to use one or more Affiliates to ------------------ hold title to any or all of the Purchased Assets, Buyer shall be deemed to have made the representations and warranties in this Article VI on behalf of itself and any such Affiliates as if the Affiliates were a signatory to this Agreement. ARTICLE VII COVENANTS OF THE PARTIES ------------------------ 7.1 Conduct of Business of the Sellers. ---------------------------------- (a) Except as described in Schedule 7.1, from the date hereof to the Closing Date, the Sellers will conduct the Business related to the Purchased Assets (to the extent the Sellers have the legal right and authority to do so) according to their ordinary and usual course of business consistent with Good Utility Practice. Without limiting the generality of the foregoing, and, except as contemplated in this Agreement or as described in Schedule 7.1, prior to the Closing Date, without the prior written consent of the Buyer (which consent shall not be unreasonably withheld), the Sellers will not with respect to the Purchased Assets or the related Business: (i) create any Encumbrance (except Permitted Encumbrances) on the Purchased Assets, except in the ordinary course of Sellers' business or as required under Sellers' debt instruments and as will be removed on or prior to the Closing Date; (ii) make any material change in the levels of fuel inventory and stores inventory customarily maintained by the Sellers with respect to the Purchased Assets, except for such changes which are consistent with Good Utility Practice; (iii) enter into any commitment for the purchase or sale of fuel having a term greater than six months and not terminable on or before the Closing Date either (i) automatically, or (ii) by option of BHE (or, after the Closing, by Buyer) in its sole 37 discretion, if the aggregate payment under such commitment and all other outstanding commitments not previously approved by the Buyer would be expected to exceed $1 million; (iv) sell, lease (as lessor), transfer or otherwise dispose of any of the Purchased Assets, other than assets used, consumed or replaced in the ordinary course of business consistent with Good Utility Practice; (v) amend, terminate or grant any waiver or consent with respect to any of the Sellers' Agreements other than in the ordinary and usual course of business, or take any action, or permit PHC to take any action, to dissolve Bangor-Pacific; (vi) enter into or amend any material real or personal property Tax agreement, treaty or settlement; (vii) make or approve any increase in the compensation payable by Sellers to any of the Employees (including, without limitation, salary, bonuses and benefits) except for increases consistent with past practices as heretofore disclosed to the Buyer; provided, however, that the foregoing shall not restrict the granting by the Sellers of voluntary early retirement and severance packages in accordance with the Employee Transition Plan solely at the Sellers' expense; (viii) enter into any oral or written contracts, agreements, commitments or arrangements (A) to do any of the foregoing matters, or (B) with respect to the Purchased Assets, in excess of $500,000 which have a term in excess of six (6) months, unless it is terminable by the Sellers and their assignee without penalty or premium upon not more than 30 days' notice, or (C) outside the ordinary course of business. (b) Without limiting the generality of the first sentence of Section 7.1, prior to the Closing Date, except with the prior written consent of the Buyer, the Sellers will, with respect to the Purchased Assets: (i) consult with the Buyer as to the making of any material decisions or the taking of any material actions in matters other than in the ordinary course of business; (ii) consult with the Buyer as to the making of any material decisions or the taking of any material actions involving environmental decisions; (iii) maintain the Purchased Assets in customary repair, working order and condition (reasonable wear and tear excepted) and, except as contemplated by Section 7.10, repair or replace any Purchased Assets damaged or destroyed by fire or other casualty; (iv) keep in force at not less than their present limits all policies of insurance to the extent reasonably practicable in light of the prevailing market conditions in the insurance industry and promptly notify Buyer of the cancellation of any such policy or any material modification thereto; and 38 (v) maintain their customary business relationships with any lessor, licensor, customer or supplier of any Seller, and maintain their relationship with Purchased Assets Employees consistent with historical practice (subject to renegotiation of the Collective Bargaining Agreement). (c) Notwithstanding anything in Section 7.1(a) or (b) to the contrary, the Sellers may, in their sole discretion (i) make Maintenance Expenditures and Capital Expenditures up to but not to exceed the Maintenance and Capital Expenditures Amount, (ii) make, at the Sellers' expense, such other maintenance and capital expenditures as the Sellers deem necessary, and (iii) take any action in respect of the Purchased Assets (not otherwise described in (a) or (b)) that does not adversely affect the Purchased Assets or the Assumed Liabilities. 7.2 Access to Information. --------------------- (a) Between the date of this Agreement and the Closing Date, the Sellers will, during ordinary business hours and upon reasonable notice (i) give the Buyer and the Buyer Representatives reasonable access to all books, records, plants, offices and other facilities and properties constituting the Purchased Assets or related to the Business or the Assumed Liabilities unless such access would violate applicable law; (ii) permit the Buyer and its representatives to make such reasonable inspections thereof as the Buyer may reasonably request; (iii) furnish the Buyer with such financial and operating data and other information with respect to the Purchased Assets, the related Business and the Assumed Liabilities as the Buyer may from time to time reasonably request; and (iv) furnish the Buyer a copy of each report, Schedule or other document filed or received by them with respect to the Purchased Assets or the related Business with the SEC, MPUC, MDEP, FERC, DOE, EPA or other relevant regulatory agency; provided, however, that (A) any such investigation shall be conducted in such a manner as not to interfere unreasonably with the operation of the Purchased Assets, (B) the Sellers shall not be required to take any action which would constitute a waiver of the attorney-client privilege and (C) the Sellers need not supply the Buyer with any information which the Sellers, in their reasonable judgment, are under a legal obligation not to supply, provided that Sellers describe, to the extent permissible, the nature of the information withheld. Notwithstanding anything in this Section 7.2 to the contrary, (i) the Sellers will only furnish or provide such access to personnel and medical records as is required by law, and (ii) the Buyer shall not have the right to perform or conduct any environmental sampling or testing at, in, on, or underneath or adjacent to the Purchased Assets. (b) All information furnished to or obtained by the Buyer and the Buyer Representatives pursuant to this Section 7.2 shall be "Information" for purposes of Section 7.11 hereof. (c) Subject to the last two sentences of this paragraph (c), for a period of ten years after the Closing Date, the Sellers and their representatives shall have reasonable access to all of the books and records of the Purchased Assets transferred to the Buyer hereunder to the extent that such access may reasonably be required by the Sellers in connection with matters relating to or affected by the operation of the Purchased Assets prior to the Closing Date. Such access shall be afforded by the Buyer upon receipt of reasonable advance notice and during normal business hours. The Sellers shall be solely responsible for any costs or expenses incurred 39 by them pursuant to this Section 7.2(c). If the Buyer shall desire to dispose of any such books and records prior to the expiration of such ten-year period, the Buyer shall, prior to such disposition, give the Sellers a reasonable opportunity, at the Sellers' expense, to segregate and remove such books and records as the Sellers may select. (d) Subject to the last two sentences of this paragraph (d), for a period of ten years after the Closing Date, the Buyer and Buyer Representatives shall have reasonable access to all of the books and records of the Purchased Assets retained by the Sellers to the extent that such access may reasonably be required by the Buyer in connection with matters relating to or affected by the operation of the Purchased Assets subsequent to the Closing Date; provided, however, that Sellers shall not be required to provide access to personnel or medical records except as required by law. Such access shall be afforded by the Sellers upon receipt of reasonable advance notice and during normal business hours. In addition, the Sellers will cooperate in the defense of any action brought against the Buyer by a former employee of the Sellers. The Buyer shall be solely responsible for any costs or expenses incurred by it pursuant to this Section 7.2(d). If any Seller shall desire to dispose of any such books and records prior to the expiration of such ten-year period, such Seller shall, prior to such disposition, give the Buyer a reasonable opportunity at the Buyer's expense, to segregate and remove such books and records as the Buyer may select; provided, however, that the Sellers will use best efforts to preserve all employment and medical records of those employees who are hired by the Buyer as of the Closing Date, for a period of not less than ten (10) years from the Closing Date. (e) If within ten years after the Closing Date the MPUC shall commence an investigation of the reasonableness of any term or condition of this Agreement, Buyer shall fully cooperate with the Sellers in providing any information or testimony which may be helpful to Sellers in establishing the reasonableness of the terms and conditions of the Agreement. Sellers shall be responsible for any costs or expenses incurred by Buyer pursuant to this Section 7.2(e). 7.3 Expenses. Except to the extent specifically provided herein, whether -------- or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the party incurring such costs and expenses, including, without limitation, any expenses associated with litigation arising out of this Agreement or any of the transactions contemplated hereunder. Notwithstanding anything to the contrary herein, the Buyer will be responsible for (a) all costs and expenses associated with the obtaining of any title insurance policy and all endorsements thereto that the Buyer elects to obtain, and (b) all filing fees of Buyer as an acquiring person under the HSR Act. Sellers and Buyer each represent and warrant to the other, respectively, that, except for Reed Consulting Group, Inc., which is acting for and at the expense of the Sellers, no broker, finder or other person is entitled to any brokerage fees, commissions or finder's fees in connection with the transactions contemplated hereby by reason of any action taken by the party making such representation. The Sellers and Buyer will pay to the other, or otherwise discharge, and will indemnify and hold the other harmless from and against, any and all claims or liabilities for all brokerage fees, commissions, and finders' fees (other than as described above) incurred by reason of any action taken by the indemnifying party. 40 7.4 Further Assurances. ------------------ (a) Each of the parties hereto will use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the sale of the Purchased Assets pursuant to this Agreement. From time to time after the Closing Date, without further consideration, the Sellers will reasonably cooperate with the Buyer in its efforts to maximize any tax benefits associated with the Purchased Assets with respect to periods following the Closing Date and to minimize the tax costs associated with the transactions contemplated hereby, and will, at their own expense, execute and deliver such documents to the Buyer as the Buyer may reasonably request in order to more effectively vest in the Buyer the Sellers' title to the Purchased Assets. From time to time after the Closing Date, the Buyer will reasonably cooperate with the Sellers in their efforts to maximize any tax benefits associated with the Purchased Assets with respect to periods prior to the Closing Date and to minimize the tax costs associated with the transactions contemplated hereby, and will, at its own expense, execute and deliver such documents to the Sellers as the Sellers may reasonably request in order to more effectively consummate the sale of the Purchased Assets pursuant to this Agreement. (b) Subject to Section 3.5, in the event that any Purchased Asset shall not have been conveyed to the Buyer at the Closing, the Sellers shall, subject to Section 7.4(c), use their best efforts to convey such asset to the Buyer as promptly as is practicable after the Closing. In the event that any Easement shall not have been retained by a Seller after the Closing, the Buyer shall use its best efforts to grant such Easement to such Seller as promptly as is practicable after the Closing. Nothing contained herein shall require the Sellers or the Buyer to institute any litigation or to pay or agree to pay any sum of money to convey such asset or grant such easement. (c) To the extent that the Sellers' rights under any Sellers' Agreement may not be assigned without the consent of another Person which consent has not been obtained, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or be unlawful, and the Sellers, at their expense, shall use their best efforts to obtain any such required consent(s) as promptly as possible. The Sellers and the Buyer agree that if any consent to an assignment of any Sellers' Agreement shall not be obtained or if any attempted assignment would be ineffective or would impair the Buyer's rights and obligations under the Sellers' Agreement in question so that the Buyer would not in effect acquire the benefit of all such rights and obligations, the Sellers, to the maximum extent permitted by law and such Sellers' Agreement, shall with respect to any such Sellers' Agreement, appoint the Buyer to be the Sellers' agent with respect to such Sellers' Agreement, and enter into such reasonable arrangements with the Buyer as are necessary to provide the Buyer with the benefits and obligations of such Sellers' Agreement. Schedule 1.1(a)(53) identifies those agreements that will be assigned to the Buyer and those agreements which will be governed by the preceding sentence. (d) Sellers and Buyer covenant and agree to negotiate and enter into in good faith such further agreements as may be necessary for operating the Purchased Assets after the Closing Date. 41 (e) The parties agree and acknowledge that certain of the Permits issued by the FERC include assets included in the Purchased Assets as well as other assets of the Sellers which are not to be conveyed to the Buyer pursuant to this Agreement. In connection with the parties' performance of their obligations under Section 7.4(a) hereof, the parties agree to take all action necessary in order that any such Permit, when transferred to the Buyer, will be modified appropriately to reflect the retention by the Sellers of the assets to be retained by them and the retention by the Sellers of any necessary Permit with respect to such retained assets. (f) BHE agrees to consult with Buyer in connection with any matter on which the participants in NEPOOL are entitled to vote or give consent or approve and which could affect the Purchased Assets in any material respect. 7.5 Public Statements. Between the date of this Agreement and the Closing ----------------- Date, the Sellers and the Buyer agree that they will consult with each other in advance of making any public announcement or press release, or otherwise disclosing any information, relating to the execution of this Agreement or any transactions contemplated hereby, or otherwise relating to the Purchased Assets, and will negotiate in good faith with respect to the form, content and timing thereof and shall not issue any such release without the prior approval of the other party; provided, however, that each party reserves the right to make such statements to regulatory authorities in the ordinary course of business or as are required, in the opinion of its counsel, by applicable law. 7.6 Consents and Approvals. ---------------------- (a) The Sellers and the Buyer shall each file or cause to be filed with the Federal Trade Commission and the United States Department of Justice any notifications required to be filed under the HSR Act and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby. The parties shall consult with each other as to the appropriate time of filing such notifications and shall use their best efforts to make such filings at the agreed upon time, to respond promptly to any requests for additional information made by either of such agencies, and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date after the date of filing. Buyer will pay all filing fees of Buyer as an acquiring person under the HSR Act in accordance with Section 7.3, and each of the parties shall bear its own costs of the preparation of any filing. (b) The Sellers and the Buyer shall cooperate with each other and (i) promptly prepare and file all necessary documents, (ii) effect all necessary applications, notices, petitions and filings and execute all agreements and documents, (iii) use their respective best efforts to obtain the transfer or reissuance to the Buyer of all necessary Permits, Environmental Permits, consents, approvals and authorizations of all governmental bodies, including without limitation Permits related to the 345 Line, and (iv) use their respective best efforts to obtain all necessary consents, approvals and authorizations of all other parties, in the case of each of the foregoing clauses (i), (ii), (iii) and (iv), necessary or advisable to consummate the transactions contemplated by this Agreement (including, without limitation, the Seller Required Regulatory Approvals, the Seller Required Consents and the Buyer Required Regulatory Approvals) or for the Buyer to own, operate or maintain, on and after the Closing Date, the Purchased Assets substantially as such assets have been historically owned, operated and maintained by the Sellers 42 prior to the date of this Agreement, or required by the terms of any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument to which any Seller or the Buyer is a party or by which either of them is bound. Each of the Sellers and the Buyer shall have the right to review in advance all characterizations of the information relating to the transactions contemplated by this Agreement which appear in any filing made in connection with the transactions contemplated hereby. (c) The Sellers shall use their best efforts prior to and, if necessary, after the Closing Date to obtain the Seller Required Consents, and the Buyer shall use its best efforts prior to and, if necessary, after the Closing Date to obtain the Buyer Required Regulatory Approvals. If any such consent or approval is not obtained, the Sellers and the Buyer agree to cooperate in any reasonable arrangements (which may include, in the case of leased property, a sublease thereof) designed to provide for the Buyer all of the benefits (and to assure that the Sellers will be effectively relieved from related liabilities) under such contract, agreement, lease, commitment or right, including enforcement for the benefit of the Buyer, at the Sellers' expense, of any and all rights of the Sellers against the other party or parties thereto. Nothing in this Agreement shall be construed as an attempt or agreement to assign (i) any contract which is nonassignable without the consent of the other party or parties thereto unless such consent shall have been given, or (ii) any contract or claim as to which all the remedies for the enforcement thereof would not pass to the Buyer as an incident of the assignments provided for by this Agreement. (d) Each of Buyer and the Sellers mutually agree for the benefit of the other that, between the date of this Agreement and the Closing Date, neither Buyer, Sellers nor any of their respective controlled Affiliates will enter into any agreement, commitment or undertaking which would reasonably be expected to impair the ability of Buyer and Sellers to complete the purchase and sale of the Purchased Assets at the earliest time that the conditions set forth in Article VIII are satisfied. 7.7 Tax Matters. ----------- (a) All transfer and sales or use taxes incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Buyer, whether imposed on the Buyer or the Sellers, and the Buyer, at its own expense, will file, to the extent required by applicable law, all necessary Tax Returns and other documentation with respect to all such transfer or sales taxes, and, if required by applicable law, the Sellers will join in the execution of any such Tax Returns or other documentation and will take such positions therein as are reasonably requested by the Buyer. Sellers shall be responsible for the payment of all their respective Taxes payable with respect to any period or portion thereof prior to the Closing Date. (b) With respect to Taxes to be prorated in accordance with Section 3.4 of this Agreement only, the Buyer shall prepare and timely file all Tax Returns required to be filed with respect to the Purchased Assets, if any, and shall duly and timely pay all such Taxes, whether imposed on the Buyer or the Sellers, shown to be due on such Tax Returns. The Buyer's preparation of any such Tax Returns shall be subject to the Sellers' approval, which approval shall not be unreasonably withheld. The Buyer shall make such Tax Returns available for the Sellers' review and approval no later than fifteen (15) Business Days prior to the due date for 43 filing such Tax Return. Within ten (10) Business Days after receipt of such Tax Return, the Sellers shall pay to the Buyer the Sellers' proportionate share of the amount shown as due on such Tax Returns determined in accordance with Section 3.4 of this Agreement to the extent Sellers are liable therefor pursuant thereto and to the extent not already paid or accrued as a liability on Sellers' balance sheets as of June 30, 1998. (c) After the Closing Date, Buyer and Sellers shall provide each other with such cooperation and information relating to each other as either party reasonably may request in (A) filing any Tax Return, amended Tax Return or claim for Tax refund, (B) determining any Tax liability or a right to refund of Taxes, (C) conducting or defending any audit or other proceeding in respect of Taxes or (D) effectuating the terms of this Agreement. The parties shall retain all Tax Returns, schedules and work papers, and all material records and other documents relating thereto, until the expiration of the statute of limitation (and, to the extent notified by any party, any extensions thereof) of the taxable years to which such returns and other documents relate and, unless such Tax returns and other documents are offered and delivered to Sellers or Buyer, as applicable, until the final determination of any Tax in respect of such years. Any information obtained under this Section 7.7(c) shall be kept confidential, except as may be otherwise necessary in connection with filing any Tax Return, amended Tax Return, or claim for Tax refund, determining any Tax liability or right to refund of Taxes, or in conducting or defending any audit or other proceeding in respect of Taxes. Notwithstanding the foregoing, neither Seller nor Buyer, nor any of their Affiliates, shall be required unreasonably to prepare any document, or determine any information not then in its possession, in response to a request under this Section 7.7(c). (d) (i) Sellers shall use reasonable efforts to cause to be prepared and filed all Tax Returns of Bangor-Pacific for all taxable periods ending on or prior to the Closing Date and cause to be paid all Taxes relating to such Tax Returns. Upon request of Buyer, PHC shall cooperate with Buyer in making a Code Section 754 election by Bangor-Pacific with respect to obtaining an adjustment to the basis of Bangor-Pacific's assets under Code Section 743. For purposes of the allocations pursuant to Code Sections 755 and 1060 with respect to the Code Section 754 elections, Buyer and PHC mutually agree that property, plant and equipment may be assigned a value equal to fair market value and receivables may be assigned a value equal to the face amount thereof net of any bad debts for purposes of any such election. If a Code Section 754 election is to be made, Buyer shall prepare and submit within one hundred eighty (180) days after the Closing Date an allocation consistent with the allocation described above to Sellers for their review and approval, which shall not be unreasonably withheld. Provided that the other partners in Bangor-Pacific have agreed to cooperate with Buyer in causing Bangor-Pacific to make a Code Section 754 election, at the election of Buyer, Buyer and PHC shall timely complete and file the statement required by Treasury Regulation 1.743-1 and IRS Form 8594 consistent with such allocation, shall provide a copy of such form to the other party hereto and shall file a copy of such form with its federal income tax return for the period that includes the Closing Date. Sellers agree not to take any action to rescind any such Code Section 754 election now or hereafter in effect with respect to the assets of Bangor-Pacific. 44 (ii) Sellers shall have the right, at Sellers' sole expense, to represent the interests of Bangor-Pacific in any Tax audit or administrative or court proceeding relating to Tax Returns described in Section 7.7(d)(i) with respect to which any Seller may be liable for Taxes (including any such proceedings relating to Bangor-Pacific); provided, -------- however, that Buyer shall have the right to participate in any such audit ------- or proceeding to the extent that any such audit or proceeding may affect the Tax liability of Buyer, any of its Affiliates, or Bangor-Pacific for any period ending after the Closing Date (with the right to consent to any settlement which may affect the Tax liability of Buyer, which consent shall not be unreasonably withheld) and to employ counsel of its choice at its own expense for purposes of such participation. (iii) Buyer shall notify Sellers in writing, as promptly as practicable, upon receipt by Buyer, any Affiliate of Buyer, or Bangor- Pacific of notice of any pending or threatened Tax audits or assessments relating to the income, properties or operations of any Seller or Bangor- Pacific, in each case for Pre-Closing Periods only, so long as Pre-Closing Periods remain open; provided, however, that failure by Buyer to comply -------- ------- with this Section 7.7(d)(iii) shall not affect Buyer's right to indemnification relating to Taxes if such failure does not prejudice the rights of Sellers. Sellers shall notify Buyer in writing as promptly as practicable upon receipt by Sellers or any Affiliate of Sellers of notice of any pending or threatened Tax audits or assessments relating to the income, properties or operations of Bangor-Pacific. (e) The obligations of the Buyer and Sellers under this Section 7.7 shall survive the Closing and shall continue until the expiration of the applicable statute of limitations. 7.8 Supplements to Schedules. Prior to the Closing Date, the Sellers shall ------------------------ supplement or amend the Schedules required by this Agreement with respect to any matter relating to the Purchased Assets hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such Schedules. No supplement or amendment of any Schedule made pursuant to this Section shall be deemed to cure any breach of any representation or warranty made in this Agreement unless the parties agree thereto in writing. 7.9 Employees. --------- (a) During the period beginning on the date of this Agreement and ending on the Window Expiration Date ("Buyer's Window"), the Buyer may offer employment, effective as of the Closing Date, to employees of BHE who are presently employed principally in connection with the ownership and operation of the Purchased Assets and whose names and titles are listed individually in a list previously provided by BHE to the Buyer (all such employees hereinafter referred to as "Employees"). Notwithstanding the foregoing, any such individual who, following the date hereof, changes job position of his/her own volition pursuant to BHE's existing internal job posting procedures and, as a result of such change, ceases to be employed principally in connection with the ownership and operation of the Purchased Assets shall not be considered an Employee for purposes of this Section 7.9, provided, that Buyer may offer employment during the Buyer's Window to replacement individuals who in general perform the functions and duties of such departed individual, in which case the Buyer's Window will extend for an additional 30 45 days in respect of such replacement individual (and any such replacement individual shall be considered an Employee for the purposes of this Section 7.9). To the extent permitted by law, BHE will provide reasonable access to information (excepting personnel and medical records) and individuals reasonably necessary to the Buyer in connection with Buyer's consideration of such offers. All such offers of employment shall be made in accordance with all applicable laws and regulations. Each person who becomes employed by the Buyer pursuant to this Section 7.9 shall be referred to herein as a "Transferred Employee." Any changes in the terms and conditions of employment of any Transferred Employee shall be made in accordance with the applicable provisions of Chapter 32 of Title 35-A ("An Act to Restructure the State's Electric Industry") (the "Maine Restructuring Law") including 35-A M.R.S.A. (S)3216 and any rules adopted by the MPUC implementing those statutory requirements, including Chapter 303. Subject to any and all applicable provisions of the Collective Bargaining Agreement, during the Buyer's Window, Sellers will refrain from offering post-Closing employment to any of the Employees without the prior consent of the Buyer, other than those Employees whom the Buyer indicates in writing it does not intend to hire. Without the prior written consent of BHE, the Buyer shall not solicit, directly or indirectly, for employment any employees of BHE or any of its Affiliates at any time beginning on the date hereof and up to and including the second anniversary of the Closing Date, other than offers to Employees made during the Buyer's Window. Subject to any and all applicable provisions of the Collective Bargaining Agreement, Sellers shall not, without the prior written consent of the Buyer, solicit for employment any Employee to whom the Buyer makes an offer within the Buyer's Window and who becomes a Transferred Employee, at any time beginning at the end of the Buyer's Window and ending on the second anniversary of the Closing Date. With respect to any Employee who does not become a Transferred Employee, Sellers shall be responsible for providing such Employee with any benefits to which such Employee shall become entitled under the Sellers' Employee Transition Plan, as well as any other termination or severance benefits to which such Employee may be entitled. (b) The Buyer acknowledges that the Collective Bargaining Agreement expires on December 31, 1998, and that BHE is obligated to bargain in good faith with Local 1837 with respect to a replacement or extension of such Agreement, and Buyer hereby agrees to assume BHE's obligations under the Collective Bargaining Agreement with respect to any union Transferred Employees as now in effect and as it may be amended by such replacement or extension. BHE agrees to keep the Buyer regularly informed of the progress of negotiations with Local 1837 with respect to the amendment or extension of the Collective Bargaining Agreement. To the extent consistent with its obligation to bargain in good faith, BHE will use its best efforts to limit the extension of the term of the Collective Bargaining Agreement as it may apply to Employees in the bargaining unit to a date not later than December 1, 1999, unless Buyer consents to a later date, and to limit changes in the Collective Bargaining Agreement that are applicable to Employees and are adverse to the employer. 46 (c) For the period commencing on the Closing Date and ending December 31, 2001, the Buyer shall provide all Transferred Employees with total compensation (including, without limitation, base salary and overtime, bonuses, and benefits contained in the employee benefit plans, programs and fringe benefit arrangements of Buyer) which the Buyer in good faith believes is, in the aggregate, substantially equivalent in value to the total compensation provided to such employees by BHE immediately prior to the Closing Date (except that Buyer shall not be required to provide compensation to such employees corresponding to any bonuses or other incentive compensation paid by BHE). Nothing herein shall be deemed to guarantee a Transferred Employee continued employment with the Buyer for any definite period of time. (d) As of the Closing Date, all Transferred Employees shall cease to participate in the employee welfare benefit plans (as such term is defined in ERISA) maintained or sponsored by BHE (the "Prior Welfare Plans") and shall, if applicable, commence to participate in welfare benefit plans of the Buyer or its Affiliates (the "Replacement Welfare Plans"). The Buyer shall (i) waive all limitations as to pre-existing condition exclusions and waiting periods with respect to Transferred Employees under the Replacement Welfare Plans, other than, but only to the extent of, limitations or waiting periods that were in effect with respect to such employees under the Prior Welfare Plans and that have not been satisfied as of the Closing Date, and (ii) provide each Transferred Employee with credit for any co-payments and deductibles paid prior to the Closing Date in satisfying any deductible or out-of-pocket requirements under the Replacement Welfare Plans (on a pro-rata basis in the event of a difference in plan years). (e) The Buyer shall take any and all necessary action to cause the trustee of a tax-qualified defined contribution plan of the Buyer or one of its Affiliates, if requested to do so by a Transferred Employee, to accept a direct "rollover" of all or a portion of said employee's distribution from any defined contribution retirement plan of BHE. (f) Buyer shall pay to each Transferred Employee whose employment is involuntarily terminated by the Buyer or any of its Affiliates subsequent to the Closing Date and prior to December 31, 2001, except where such employment is terminated for cause, unless such cause is beyond the control of the Transferred Employee as in the case of a layoff for lack of work, the "Benefits Required By Legislative Mandate" (as defined in the Employee Transition Plan of BHE prepared pursuant to the Maine Restructuring Law (the "Employee Transition Plan")) that would have been provided to such individual upon such termination by BHE under the Employee Transition Plan, had such employee remained continuously employed by BHE and had such individual been eligible under, and covered by, such plan on the date of such termination; provided however, that no such benefit shall be required to be paid by the Buyer to any such employee who either received the Benefits Required By Legislative Mandate or elected to receive the "Enhanced & Unreduced Accrued Benefit Option" from BHE under (and as defined in) the Employee Transition Plan. (g) Sellers agree to timely perform and discharge all requirements under the WARN Act, if any, and under applicable state and local laws and regulations for the notification of their employees arising from the sale of the Purchased Assets to the Buyer. After the Closing Date, the Buyer shall be responsible for performing and discharging all requirements under the WARN Act, if any, and under applicable state and local laws and regulations for the notification of its employees with respect to the Purchased Assets. 47 (h) Subject to the other provisions of this Section 7.9, and except as specifically provided to the contrary in this Agreement: (1) The Sellers, and not the Buyer, shall be responsible and shall assume any and all liability for all compensation, benefits, and perquisites of any kind due any Transferred Employee on account of employment by the Sellers before the Closing Date, or the termination of employment by the Sellers, including, but not limited to, continuation of health care coverage pursuant to the health continuation coverage provisions of the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended ("COBRA") and compliance with the Health Insurance Portability and Accountability Act of 1996, as amended ("HIPAA"); and (2) The Buyer, and not the Sellers, shall be responsible and shall assume any and all liability for all compensation, benefits, and perquisites of any kind due any Transferred Employee on account of employment by the Buyer on and after the Closing Date, or the termination of employment by the Buyer, including, but not limited to, continuation of health care coverage pursuant to COBRA and compliance with HIPAA. 7.10 Risk of Loss. ------------ (a) From the date hereof through the Closing Date, all risk of loss or damage to the property included in the Purchased Assets shall be borne by the Sellers. (b) If, before the Closing Date, all or any portion of the Purchased Assets is taken by eminent domain (or is the subject of a pending or (to the Knowledge of the Sellers) contemplated taking which has not been consummated), the Sellers shall notify the Buyer promptly in writing of such fact, and Buyer shall have the option to elect (A) to eliminate the affected Purchased Asset or group of Purchased Assets and proceed with the Closing with the Purchase Price being decreased by an amount equal to the aggregate value of the eliminated Purchased Asset or group of Purchased Assets, (B) to retain the affected Purchased Asset or group of Purchased Assets and negotiate an adjustment to the Purchase Price, in which event the Buyer and the Sellers shall negotiate in good faith to settle the loss resulting from such taking (including, without limitation, by making a fair and equitable adjustment to the Purchase Price) and, upon such settlement, proceed with the Closing pursuant to the terms of this Agreement, or (C) if the aggregate value of the Purchased Asset or group of Purchased Assets taken by eminent domain exceeds 10% or more of the Purchase Price, to terminate this Agreement pursuant to Section 10.1(d); provided, however, that, subject to Section 3.5, Buyer shall not be entitled to terminate this Agreement if the affected Purchased Asset is solely (1) the Veazie Hydro Project, or (2) the Bangor-Pacific Interest. (c) If, before the Closing Date, all or any portion of the Purchased Assets is damaged or destroyed by fire or other casualty, the Sellers shall notify the Buyer promptly in writing of such fact and, if the Sellers have not notified the Buyer within thirty (30) days after the occurrence of such damage, destruction or loss of their intention to cure such damage, destruction or loss prior to Closing Date (and unless such cure is so effected prior to the Closing 48 Date), Buyer shall have the option to elect (A) to eliminate the affected Purchased Asset or group of Purchased Assets and proceed with the Closing with the Purchase Price being decreased by an amount equal to the aggregate value of the eliminated Purchased Asset or group of Purchased Assets, (B) to retain the affected Purchased Asset or group of Purchased Assets and negotiate an adjustment to the Purchase Price, in which event the Buyer and the Sellers shall negotiate in good faith to settle the loss resulting therefrom (including, without limitation, by making a fair and equitable adjustment to the Purchase Price), and, upon such settlement, proceed with the Closing pursuant to the terms of this Agreement, or (C) if the aggregate value of the Purchased Asset or group of Purchased Assets damaged or destroyed exceeds 10% or more of the Purchase Price, to terminate this Agreement pursuant to Section 10.1(d); provided, however, that, subject to Section 3.5, Buyer shall not be entitled to terminate this Agreement if the affected Purchased Asset is solely (1) the Veazie Hydro Project, or (2) the Bangor-Pacific Interest. (d) In the case of an adjustment to the Purchase Price pursuant to paragraph (b) or (c) hereof due to the taking of or damage to a Purchased Asset, the Maintenance and Capital Expenditure Amount shall be reduced by the amounts thereof attributable to such assets. 7.11 Confidential Information. ------------------------ (a) All oral and written information (collectively "Information") disclosed by any party or its representatives, whether before or after the date hereof, in connection with the transactions contemplated by or the discussions and negotiations preceding this Agreement, to any other party or its directors, officers and employees and representatives of its advisors (the persons to whom such disclosure is permissible being collectively called "Representatives"), shall (i) be kept confidential by other party and its Representatives, and shall not be disclosed by such other party and its Representatives except as otherwise provided in this Agreement, (ii) not be used by any such other persons except as contemplated by this Agreement, and (iii) be treated with the same degree of care used in protecting its own confidential and proprietary information. (b) Each party hereto will inform its Representatives of the confidential nature of the other party's Information and will be responsible for any breach of this Section 7.11 by its Representatives. (c) If any party is requested or required (by the terms of a subpoena, order, civil investigative demand or other similar process or other written request issued by a court of competent jurisdiction or by a Federal, state or local governmental body or agency) to disclose any Information of the other party (or any of the terms, conditions or other facts with respect to the transactions contemplated by this Agreement), the obligated party shall (i) provide the other party with prompt notice of such request(s) and the documents requested so that the other party may seek an appropriate protective order and/or waive the obligated party's compliance with the provisions of this Section 7.11, and (ii) take such legally available steps as the other party may reasonably request, to resist or narrow such request. If, in the absence of a protective order or the receipt of a waiver hereunder the obligated party is nonetheless, in the reasonable opinion of its legal counsel, compelled to disclose Information of the other party pursuant to any regulatory or judicial proceeding, the obligated party may disclose such Information to such tribunal without liability hereunder; provided, however, that the obligated party shall give the other party written notice of Information to be so disclosed as far in advance of its disclosure as is 49 practicable, shall furnish only that portion of the Information which is legally required, and shall request an order or other reliable assurance that confidential treatment will be accorded to such portions of the Information required to be disclosed as the affected party designates. (d) The term "Information" does not include any information which (i) becomes generally available to and known by the public (other than as a result of a unilateral disclosure directly or indirectly made by the recipient party or its Representatives), (ii) becomes available to the recipient party on a non- confidential basis from a source other than the disclosing party or its Representatives, provided that such source is not and was not bound by a confidentiality agreement with or other obligation of secrecy to the disclosing party, or (iii) which in the opinion of counsel to the disclosing party is required to be disclosed by federal securities laws, provided that the disclosing party shall consult with the other parties hereto as to the content of any such disclosure prior to its occurrence. (e) From the date hereof through the Closing Date, Buyer shall have the right to disclose Information of Sellers with respect to the Purchased Assets to financing parties and their respective representatives in connection with financing the transactions contemplated by this Agreement and to third parties in connection with planning for operations of the Purchased Assets following the Closing Date, provided that any such disclosure is made pursuant to confidentiality obligations equivalent to those provided in this Section 7.11. The Buyer shall be responsible for any breach of this Section 7.11(e) by any such third party. (f) If this Agreement is terminated in accordance with its terms, the recipient party will return promptly to the disclosing party all copies, extracts or other reproductions in whole or in part of the disclosing party's Information in the recipient party's possession or in the possession of its Representatives, and the recipient party will destroy all copies of any memoranda, notes, analyses, compilations, studies or other documents prepared by the recipient party or for the recipient party's use based on, containing or reflecting any Information. Such destruction shall, if requested, be certified in writing to the disclosing party by an authorized officer of the recipient party supervising such destruction. (g) The parties agree that each shall be entitled to equitable relief, including injunction and specific performance, in the event of any breach of the provisions of this Section 7.11, in addition to all other remedies available to such party at law or in equity. (h) This Section 7.11 supersedes the correlative provisions of the Confidentiality Agreement, which agreement is of no further force and effect, provided that Information disclosed by one party to the other party hereto prior to the date hereof shall be Information for all purposes of this Section 7.11. 7.12 Observation, Inspection and Participation. ----------------------------------------- (a) Between the date of this Agreement and the Closing Date, the Buyer shall be entitled to have a reasonable number of representatives, all of whom shall be employees of the Buyer or its Affiliates unless otherwise agreed by BHE in each instance ("Site Representatives") at any of the Purchased Assets, on a full or part time basis (whether on site or off site), as determined by the Buyer; provided, however, that (A) the presence and activities of the Site 50 Representatives shall be conducted in a manner as not to interfere unreasonably with the operation of the Purchased Assets, or with the activities of the Sellers not related to the Purchased Assets and (B) the Site Representatives shall not have access to any information that is unavailable pursuant to Section 7.2. Reasonable office space and facilities shall be made available by the Sellers to such Site Representatives. Each Site Representative shall have the right to review budgets and expenditures, audit records (except for personnel and medical records unless required by law), inspect equipment, advise on repairs required for equipment, review permits, review the progress of outages, review maintenance and operating practices and otherwise observe all activities at the above mentioned facilities in each case to the extent related to the Purchased Assets or the conduct of the Business and subject to the limitations contained in Section 7.12(b). (b) Between the date of this Agreement and the Closing Date, the Sellers shall exercise their reasonable best efforts to invite Site Representatives to attend meetings (whether internal or with third parties) in which the Sellers participate and which relate specifically to the physical operation or maintenance of the Purchased Assets or the conduct of the Business; provided, however, that such obligation shall not extend to (i) meetings of the boards of directors, or any committees thereof, of any of the Sellers or their Affiliates, (ii) meetings with governmental or regulatory authorities which are not open to the public, provided that promptly following each such a meeting Sellers shall inform the Buyer of the discussions at such meeting as they relate to the Purchased Assets, (iii) meetings as to which any participant not affiliated with any of the Sellers (or any of their Affiliates), at its own initiative, requests that Site Representatives not attend, provided that promptly following each such meeting Sellers shall inform the Buyer of the discussions at such meeting as they relate to the Purchased Assets, (iv) meetings of employees of the Sellers relating to the preparation of the Separation Document, (v) meetings with counsel, or (vi) meetings the subject matter of which, in the Sellers' reasonable judgment, if disclosed to the Buyer, would likely be detrimental to the Sellers (including, without limitation, information relating to the Sellers' proposed business activities following the Closing Date or to contractual or other matters as to which the interests of the Sellers and the Buyer may diverge). Site Representatives shall also be entitled to consult with the Sellers and make recommendations as to all activities relating to the management, operation, maintenance, construction, renewal, addition, replacement, modification and disposal of the Purchased Assets or the conduct of the Business, including, without limitation, applications for authorizations, permits and licenses, and fuel procurement and transportation. (c) The Buyer shall exercise its reasonable best efforts to invite designated representatives of the Sellers to attend all meetings between the date of this Agreement and the Closing Date with third parties in which the Buyer participates and which relate specifically to any proceedings before the FERC with respect to this Agreement, the Interconnection Agreement or the Transitional Power Sales Agreement or the transactions contemplated hereby or thereby. 7.13 Delivery of Books and Records, etc.; Removal of Property. On or prior -------------------------------------------------------- to the Closing Date, Sellers will deliver or make available to Buyer at the locations of the Purchased Assets all of the books and records and other such assets constituting a part of the Purchased Assets as are in Sellers' possession at other locations and, if at any time after the Closing Date, Sellers discover in their possession or under their control any other such books and records, 51 Sellers will promptly delivery such books and records to the Buyer. Within a reasonable time after the Closing Date and subject to the Easements and except as contemplated by the Separation Document, Sellers shall remove all assets not being sold to the Buyer pursuant to this Agreement from the Real Estate. Such removal shall be at the sole cost and risk of Sellers, including risk of loss and damage to such assets and to the Purchased Assets conveyed to the Buyer pursuant to this Agreement. 7.14 Millenium Compliance. Sellers shall use their best efforts to assure -------------------- that no later than October 1, 1999, all proprietary technology and third party proprietary technology which comprise a part of the Purchased Assets (technology so utilized is collectively referred to as "Technology") is made "Century Date Compliant." Any such Technology is deemed to be Century Date Compliant if: (a) the functions, calculations, and other computing processes of the Technology (collectively "Processes") perform in a consistent manner and correctly track and account for dates and passage of time, regardless of the date in time on which the Processes are actually performed and regardless of the date on which data was input into the product, whether before, on, or after January 1, 2000 and whether or not the dates are affected by leap years; (b) the Technology accepts, calculates, compares, sorts, extracts, sequences, and otherwise processes date inputs and date values, and returns and displays date values in a consistent manner and correctly tracks and accounts for dates and the passage of time, regardless of the dates used, whether before, on or after January 1, 2000; (c) the Technology functions without interruptions caused by the date in time on which the Processes are actually performed or by the date input to the system, whether before, on or after January 1, 2000; (d) the Technology accepts and responds to year input in a manner that resolves any ambiguities as to century in a defined and predetermined and appropriate manner; and (e) the Technology stores and displays date information in ways that are unambiguous as to the determination of the century. If, after October 1, 1999, any such Technology is discovered not to be Century Date Compliant, Sellers shall reimburse Buyer for all reasonable costs associated with making the Technology Century Date Compliant and shall indemnify Buyer for all reasonably demonstrable damages of Buyer caused by the failure of such Technology to be Century Date Compliant. ARTICLE VIII CLOSING CONDITIONS ------------------ 8.1 Conditions to Each Party's Obligations to Effect the Transactions. ----------------------------------------------------------------- The respective obligations of each party to effect the purchase and sale of the Purchased Assets shall be subject to the fulfillment at or prior to the Closing Date of the following conditions (any of which may be waived jointly by Buyer and Sellers): 52 (a) The waiting period under the HSR Act applicable to the consummation of the sale of the Purchased Assets contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any Federal or state court which prevents the consummation of the sale of the Purchased Assets contemplated hereby shall have been issued and remain in effect (each party agreeing to use its best efforts to have any such injunction, order or decree lifted) and no statute, rule or regulation shall have been enacted by any state or Federal government or governmental agency in the United States which prohibits the consummation of the sale of the Purchased Assets; (c) All Federal, state and local government consents and approvals (including but not limited to legislative and administrative consents and approvals and, in the case of clause (ii) below, any approval required to transfer, or issue or reissue in the name of Buyer, a Permit or Environmental Permit) required for (i) the consummation of the sale of the Purchased Assets and the other transactions contemplated hereby, (ii) the ownership, operation and maintenance by the Buyer of the Purchased Assets in a manner substantially consistent with the Sellers' historical ownership, operation and maintenance thereof, and (iii) the execution, delivery and performance by the parties thereto of the Ancillary Agreements, including, without limitation, the Seller Required Regulatory Approvals and the Buyer Required Regulatory Approvals, shall have been obtained, unless the failure to obtain such consent or approval would not result in a Material Adverse Effect, and shall be Final ("Final" means a final order that has not been stayed, enjoined, appealed, set aside or suspended, with respect to which any required waiting or appeal period has expired or has been waived, and as to which all conditions to effectiveness prescribed therein or otherwise by law have been satisfied); and (d) The Seller Required Consents and all other consents and approvals for the consummation of the sale of the Purchased Assets and the other transactions contemplated hereby shall have been obtained, other than those which if not obtained, would not, in the aggregate, have a Material Adverse Effect. 8.2 Conditions to Obligations of the Buyer. The obligation of the Buyer -------------------------------------- to effect the purchase of the Purchased Assets contemplated by this Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following additional conditions (all or any of which may be waived in whole or in part by the Buyer in its sole discretion): (a) There shall not have occurred and be continuing a Material Adverse Effect, provided, that, subject to Section 3.5, the absence of a -------- Material Adverse Effect which solely affects either the Veazie Hydro Project or the Bangor-Pacific Interest shall not be a condition to the obligation of the Buyer to effect the purchase of the remaining Purchased Assets; (b) (i) The representations and warranties of the Sellers set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though repeated at and as of the Closing Date, and (ii) the Sellers shall have performed and complied with in all material respects the 53 covenants and agreements contained in this Agreement that are required to be performed and complied with by the Sellers on or prior to the Closing Date; (c) The Purchased Assets shall be free and clear of Encumbrances except those Permitted Encumbrances which by definition are permitted to survive the Closing Date; (d) The Buyer shall have received certificates from authorized officers of the Sellers, dated the Closing Date, to the effect that, to the best of such officers' Knowledge, the conditions set forth in Sections 8.2(a), (b) and (c) have been satisfied; (e) The consents and approvals required to be obtained pursuant to Section 8.1(c) or (d) hereof shall not contain or be granted subject to terms or conditions which could reasonably be expected to have a Material Adverse Effect when compared to the terms and conditions presently applicable to the Purchased Assets; (f) Within the earlier to occur of forty-five (45) days after Buyer's receipt of the Title Commitments or one hundred and fifty (150) days after the date of this Agreement, Buyer shall not have notified the Seller in writing that such Title Commitments contain non-customary exceptions or qualifications that could reasonably be expected to have a Material Adverse Effect; (g) BHE and Buyer shall have entered into a memorandum of understanding with respect to the potential future development of the 345 Line and/or the Basin Mills Hydroelectric Project pursuant to which, upon the election of Buyer in its sole discretion to proceed with either of such development projects, (i) BHE shall be afforded the right to acquire for no additional consideration a 50% equity interest in the project to be developed, and BHE and Buyer shall negotiate in good faith a joint venture agreement with respect to such project which shall obligate BHE to pay 50% of project development costs, and (ii) if BHE declines to exercise such right, BHE shall, upon request of Buyer, enter into a consulting agreement with Buyer to assist Buyer in the development of such project, which agreement shall provide for reimbursement on a current basis of BHE's costs incurred under such agreement and, if the project proceeds to financial closing, a success fee of not less than 5% of the total budgeted costs for such project net of any consulting costs reimbursed to BHE by Buyer as provided above. (h) The Buyer shall have received an opinion from New York and Maine counsel to Sellers, as applicable, reasonably satisfactory to Buyer, dated the Closing Date, substantially to the effect that: (1) each Seller is a corporation organized, existing and in good standing under the laws of its state of incorporation and each state or other jurisdiction in which it is qualified to do business as a foreign corporation by virtue of owning the Purchased Assets or conducting the related Business, and each Seller has the corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby; and the execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the sale of the Purchased Assets 54 contemplated hereby have been duly authorized by all requisite corporate action taken on the part of the Sellers; (2) this Agreement and the Ancillary Agreements have been duly executed and delivered by the Sellers and (assuming that the Seller Required Regulatory Approvals, the Seller Required Consents and the Buyer Required Regulatory Approvals are obtained) are valid and binding obligations of the Sellers, enforceable against the Sellers in accordance with their terms, except (A) that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights, and (B) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought; (3) the execution, delivery and performance of this Agreement and the Ancillary Agreements by the Sellers will not constitute a violation of the Articles of Incorporation or Bylaws, as currently in effect, of any Seller; (4) the Bill of Sale and other documents described in Section 4.3 are in proper form to transfer to the Buyer title to the Purchased Assets; and (5) no declaration, filing or registration with, or notice to, or authorization, consent or approval of any governmental authority is necessary for the consummation by the Sellers of the Closing other than (i) the Seller Required Regulatory Approvals, all of which have been obtained and are Final, (ii) such declarations, filings, registrations, notices, authorizations, consents or approvals which if not obtained or made, would not, in the aggregate, have a Material Adverse Effect and (iii) the Seller Required Consents, all of which have been obtained. As to any matter contained in such opinion which involves the laws of any jurisdiction other than the Federal laws of the United States or the laws of the State of Maine, such counsel may rely upon opinions of counsel admitted in such other jurisdictions. Any opinions relied upon by such counsel as aforesaid shall be delivered together with the opinion of such counsel. Such opinion may expressly rely as to matters of fact upon certificates furnished by the Sellers and appropriate officers and directors of the Sellers and by public officials; (i) All corporate and other proceedings to be taken by the Sellers in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Buyer and its counsel, and the Buyer and its counsel shall have received all such certified or other copies of such documents as it or they may reasonably request; and (j) Sellers shall have delivered to the Buyer duly executed counterparts of each document or agreement contemplated to be delivered by Sellers under Section 4.3 of this 55 Agreement and the conditions to effectiveness of each such agreement (the Effective Date, if any, as defined therein) shall have been satisfied. 8.3 Conditions to Obligations of the Sellers. The obligation of the ---------------------------------------- Sellers to effect the sale of the Purchased Assets contemplated by this Agreement shall be subject to the fulfillment (all or any of which may be waived by Seller) at or prior to the Closing Date of the following additional conditions: (a) The Sellers shall have received the Preliminary Purchase Price from Buyer; (b) (i) The representations and warranties of the Buyer set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though repeated at and as of the Closing Date, and (ii) the Buyer shall have performed and complied in all material respects with its covenants and agreements contained in this Agreement which are required to be performed on or prior to the Closing Date; (c) The Sellers shall have received a certificate from an authorized officer of the Buyer, dated the Closing Date, to the effect that, to the best of such officer's Knowledge, the conditions set forth in Sections 8.3(a) and (b) have been satisfied; (d) The consents and approvals required to be obtained pursuant to Section 8.1(c) hereof shall not contain, or be granted subject to, terms or conditions which, from the Sellers' perspective, materially and adversely affect the benefits to the Sellers under this Agreement or the transactions contemplated hereby; (e) All corporate and other proceedings to be taken by the Buyer in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Sellers and their counsel, and the Sellers and their counsel shall have received all such certified or other copies of such documents as it or they may reasonably request; and (f) The Sellers shall have received an opinion from counsel for Buyer reasonably satisfactory to Sellers, dated the Closing Date, to the effect that: (1) Buyer is a corporation organized, existing and in good standing under the laws of the Commonwealth of Pennsylvania, and has the corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby; and the execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the sale and purchase of the Purchased Assets contemplated hereby have been duly authorized by all requisite corporate action taken on the part of the Buyer; (2) this Agreement and the Ancillary Agreements have been duly executed and delivered by the Buyer and (assuming that the Seller Required Regulatory Approvals, the Seller Required Consents and the Buyer Required Regulatory Approvals are obtained) are valid and binding obligations of the Buyer, 56 enforceable against the Buyer in accordance with their respective terms, except (A) that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to the creditors' rights and (B) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought; (3) the execution, delivery and performance of this Agreement and the Ancillary Agreements by the Buyer will not constitute a violation of the Certificate of Incorporation or by-laws (or other similar governing documents), as currently in effect, of the Buyer; (4) the Assignment and Assumption Agreement and other instruments described in Section 4.4 are in proper form and are effective for the Buyer to assume the Assumed Liabilities; and (5) no declaration, filing or registration with, or notice to, or authorization, consent or approval of any governmental authority is necessary for the consummation by the Buyer of the Closing other than (i) the Buyer Required Regulatory Approvals, all of which have been obtained and are Final, and (ii) any other declarations, filings, registrations, notices, authorizations, comments or approvals which if not obtained would not prevent the payment by Buyer of the Purchase Price. As to any matter contained in such opinion which involves the laws of any jurisdiction other than the Federal laws of the United States, the Commonwealth of Pennsylvania or the State of Maine, such counsel may rely upon opinions of counsel admitted to practice in such other jurisdictions. Any opinions relied upon by such counsel as aforesaid shall be delivered together with the opinion of such counsel. Such opinion may expressly rely as to matters of fact upon certificates furnished by appropriate officers and directors of the Buyer and its respective Affiliates and by public officials; and (g) Buyer shall have delivered to Sellers the documents and agreements contemplated to be delivered by the Buyer in Section 4.4 or elsewhere in this Agreement. ARTICLE IX INDEMNIFICATION --------------- 9.1 Indemnification. --------------- (a) Sellers will indemnify, defend and hold harmless the Buyer and its affiliates and their respective directors, officers, employees, agents and representatives ("Buyer Group") from and against any and all claims, demands or suits (by any Person), losses, liabilities, damages (but excluding, except to the extent claimed by third parties, any consequential, special, 57 indirect, punitive or incidental damages, including without limitation lost profits), obligations, payments, costs and expenses (including, without limitation, the costs and expenses of any and all actions, suits, proceedings, assessments, penalties, fines, judgments, settlements and compromises relating thereto, reasonable disbursements in connection therewith, reasonable attorneys' and consultants' fees, investigation, removal or response cleanup and remedial costs) (each, an "Indemnifiable Loss"), asserted against or suffered by the Buyer Group relating to, resulting from or arising out of (i) any breach of any representation or warranty (without regard to any qualifications with respect to Material Adverse Effect contained therein) of the Sellers contained in this Agreement or any schedule hereto, or any certificate delivered by or on behalf of Sellers in connection herewith, (ii) any covenant or agreement of Sellers set forth in Sections 7.1, 7.2(a), 7.5, 7.6(a), 7.6(d), 7.8, 7.10 or 7.12, (iii) any breach of any other covenant or agreement of the Sellers contained in this Agreement, any schedule hereto, or any certificate delivered by or on behalf of Sellers in connection herewith, or (iv) the Excluded Liabilities, provided, -------- however, that, in the case of any Indemnifiable Loss arising under clause (i) or - ------- (ii) of this Section 9.1(a) ("Certain Indemnifiable Losses"), (W) such indemnification shall be effective only with respect to claims written notice of which is received by Sellers no later than eighteen months after the Closing Date, (X) no amounts shall be due and payable to the extent that the sum of Certain Indemnifiable Losses plus all Seller Indemnified Environmental Losses (as defined below) is equal to $500,000 or less, (Y) in no event shall the aggregate amount of all payments made by the Sellers with respect to Certain Indemnifiable Losses exceed ten percent (10%) of the Purchase Price, and (Z) the foregoing limitations on Sellers' indemnity shall not apply to the extent the Certain Indemnifiable Loss results from any successor liability of Buyer arising out of a failure of Bangor-Pacific to file any Tax Return required to be filed by it prior to the Closing, or the failure of Sellers to file any Tax Return or pay any Tax required to be filed or paid by them under this Agreement, and provided, further, that in the case of any Indemnifiable Loss relating to the - -------- ------- Excluded Liabilities of Sellers described in Section 2.4(vi) (hereinafter, "Seller Indemnified Environmental Losses"), (1) such indemnification shall be effective only with respect to claims written notice of which is received by Sellers no later than the third anniversary of the Closing Date, (2) no amounts shall be due and payable to the extent that the sum of such Seller Indemnified Environmental Losses plus the Certain Indemnifiable Losses is equal to $500,000 or less and (3) in no event shall the aggregate amount of all payments made by the Sellers with respect to such Seller Indemnified Environmental Losses exceed $20 million. (b) The Buyer will indemnify, defend and hold harmless the Sellers and their affiliates and their respective directors, officers, employees, agents and representatives ("Sellers Group") from and against any and all Indemnifiable Losses asserted against or suffered by the Sellers Group relating to, resulting from or arising out of (i) any breach of any representation or warranty of the Buyer contained in this Agreement, any schedule hereto, or any certificate delivered by or on behalf of Buyer in connection herewith, (ii) any covenant or agreement of the Buyer set forth in Sections 7.5, 7.6(a), 7.6(d), 7.10 or 7.12, (iii) any breach of any other covenant or agreement of the Buyer contained in this Agreement, any schedule hereto, or any certificate delivered by or on behalf of Buyer in connection herewith, or (iv) the Assumed Liabilities, provided, however, that in the case of any Indemnifiable Loss arising under - -------- ------- clause (i) or (ii) of this Section 9.1(b), (X) such indemnification shall remain in effect only with respect to claims written notice of which is received by Buyer no later than eighteen months after the Closing Date, (Y) no amounts shall be due and payable to the extent that the aggregate amount of such Indemnifiable Losses is equal to $500,000 or less and (Z) in no event shall the aggregate amount 58 of all payments made by the Buyer with respect to such Indemnifiable Losses exceed ten percent (10%) of the Purchase Price. (c) Any Person entitled to receive indemnification under this Agreement (an "Indemnitee") having a claim under these indemnification provisions shall make a good faith effort to recover all losses, damages, costs and expenses from insurers of such Indemnitee under applicable insurance policies so as to reduce the amount of any Indemnifiable Loss hereunder. The amount of any Indemnifiable Loss shall be reduced (i) to the extent that the Indemnitee receives any insurance proceeds with respect to an Indemnifiable Loss and (ii) to take into account any net Tax benefit recognized by the Indemnitee arising from the recognition of the Indemnifiable Loss and any payment actually received with respect to an Indemnifiable Loss. (d) The expiration, termination or extinguishment of any representation, warranty, covenant or agreement shall not affect the parties' obligations under this Section 9.1 if the Indemnitee provided the person required to provide indemnification under this Agreement (the "Indemnifying Party") with proper notice of the claim or event for which indemnification is sought prior to such expiration, termination or extinguishment. (e) Other than as provided in Section 10.2 hereof, the rights and remedies of the Sellers and the Buyer under this Article IX are exclusive and in lieu of any and all other rights and remedies which the Sellers and the Buyer may have under this Agreement or otherwise for monetary relief with respect to (i) any breach or failure to perform any representation, warranty, covenant or agreement set forth in this Agreement, any schedule hereto, or any certificate delivered by or on behalf of Sellers or Buyer in connection herewith or (ii) the Assumed Liabilities or the Excluded Liabilities, as the case may be. The rights and obligations of indemnification under this Section 9.1 shall not be limited or subject to set-off based on any violation or alleged violation of any obligation under this Agreement or otherwise, including but not limited to breach or alleged breach by the Indemnitee of any representation, warranty, covenant or agreement contained in this Agreement. 9.2 Defense of Claims. ----------------- (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any claim, action, or proceeding made or brought by any Person who is not a party to this Agreement or any Affiliate of a party to this Agreement (a "Third Party Claim") with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee will give such Indemnifying Party prompt written notice thereof, but in any event not later than twenty (20) days after the Indemnitee's receipt of notice of such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in reasonable detail (including a copy of the Third Party Claim if made in writing) and will indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right, by giving written notice to the Indemnitee as provided below, to elect to assume the defense of any Third Party Claim at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, by all appropriate proceedings, which proceedings will be diligently prosecuted, and the Indemnitee will upon request of an Indemnifying Party cooperate in good faith in such defense at the Indemnifying Party's expense. 59 If the Indemnifying Party assumes the defense of any Third Party Claim, the Indemnified Party is hereby authorized (but not obligated), at the expense of the Indemnified Party, to file any motion, answer or other pleading and to take any other action which the Indemnified Party deems necessary or appropriate to protect the Indemnified Party's interests, provided that such action is not prejudicial to the Indemnifying Party's defense in any material respect. Notwithstanding the assumption of defense by the Indemnifying Party, the Indemnitee may take over the control of the defense or settlement of a Third Party Claim at any time if it irrevocably waives its right to indemnity with respect to such Third Party Claim. (b) The Indemnifying Party will have a period of fifteen (15) days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claim within which to notify the Indemnitee in writing that (i) the Indemnifying Party disputes liability to the Indemnitee hereunder with respect to the Third Party Claim and, if so, the basis for the dispute, and (ii) if the Indemnifying Party does not dispute liability, whether or not the Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in the last sentence of Section 9.2(a). If the Indemnifying Party has assumed the defense, it will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof. Without the prior written consent of the Indemnitee in its sole discretion, the Indemnifying Party will not enter into any settlement of any Third Party Claim which would lead to liability or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee does not simultaneously receive full indemnification or which would fail to result in the Indemnitee receiving a release of the Indemnitee reasonably satisfactory to it. If the Indemnifying Party fails to assume the defense, assumes the defense but fails to diligently prosecute it, or fails to give any notice when required hereunder, then the Indemnitee will have the right to defend against such Third Party Claim, at the sole cost and expense of the Indemnifying Party, and, if requested by the Indemnitee, the Indemnifying Party will at the sole cost and expense of the Indemnifying Party, cooperate with the Indemnitee and its counsel in such defense. If the Indemnifying Party disputes its liability for any portion of such Third Party Claim, the Indemnitee will be free to seek enforcement of its rights, if any, to indemnification under this Agreement. (c) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct Claim") will be asserted by giving the Indemnifying Party written notice thereof prior to the expiration of the indemnification notice period, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event not later than twenty (20) days after the Indemnitee becomes aware of such Direct Claim, and the Indemnifying Party will have a period of thirty (30) days within which to respond to such Direct Claim, specifying the portion of the Direct Claim that is disputed and the basis for such position. If Indemnifying Party does not respond within such thirty (30) day period the Indemnifying Party will be deemed to have accepted such claim. If the Indemnifying Party responds within such thirty (30) day period, the Indemnifying Party will be deemed to have accepted and be liable for payment of the undisputed portion of such claim, if any, on demand. If the Indemnifying Party rejects any portion of such claim, the Indemnitee will be free to seek enforcement of its rights to indemnification under this Agreement. (d) If the amount of any Indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or 60 otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by or against any other entity, the amount of such reduction, less any costs, expenses or premiums incurred in connection therewith, will promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any indemnity payment, the Indemnifying Party will, to the extent of such indemnity payment, be subrogated to all rights of the Indemnitee against any third party in respect of the Indemnifiable Loss to which the indemnity payment relates; provided, however, that (i) the Indemnifying Party will then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, any and all claims of the Indemnifying Party against any such third party on account of said indemnity payment is hereby made expressly subordinated and subjected in right of payment to the Indemnitee's rights against such third party. Without limiting the generality or effect of any other provision hereof, each such Indemnitee and Indemnifying Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights. Nothing in this Section 9.2(d) shall be construed to require any party hereto to obtain or maintain any insurance coverage. The rights contained herein shall not be duplicative of any reductions effected pursuant to Section 9.1(c) hereof. (e) Subject to clauses (X) and (1) of the provisos to Section 9.1(a) and clause (X) of the proviso to Section 9.1(b) hereof, a failure to give timely notice as provided in this Section 9.2 will not affect the rights or obligations of any party hereunder except if, and only to the extent that, as a result of such failure, the party which was entitled to receive such notice was actually prejudiced as a result of such failure. (f) During the three-year period following the Closing Date, if the Buyer acquires Knowledge of an event, condition or circumstance described in Sections 2.3(a)(v), 2.4(v) or 2.4(vi) of this Agreement, including, without limitation, any event, act, omission, loss, circumstance, injury, damage, Release or occurrence (an "Environmental Condition"), the Buyer shall give prompt written notice to BHE of such Environmental Condition regardless of whether it is a matter for which Buyer is indemnified by Sellers under this Agreement (provided that subsection (e) of this Section shall apply to such notice). Excluded from this notice requirement are Environmental Conditions existing as of the date of this Agreement that have been disclosed to the Buyer by the Sellers. Such notice shall describe the Environmental Condition in reasonable detail and include a copy of any written documentation in Buyer's (or its agents') possession regarding the Environmental Condition. Until Sellers shall no longer have any indemnification obligations with respect to Seller Indemnified Environmental Losses under Section 9.1(a) hereof, if either (i) the notice states that such Environmental Condition is a matter with respect to which Buyer or any member of the Buyer Group is seeking or may seek indemnification from Sellers hereunder, or (ii) BHE otherwise reasonably concludes that the existence of or the potential remediation of such Environmental Condition could result in a Seller Indemnified Environmental Loss, then, in addition to the rights set forth elsewhere in this Section 9.2, BHE shall have the right, at its sole cost and expense, to conduct and control any investigation and/or remediation ("Remediation") relating to or arising out of the Environmental Condition. If Sellers conduct the Remediation, 61 (1) Buyer shall have the right to participate in the planning and design of any such Remediation and the right to participate in any meetings with, hearings before or other sessions with any governmental body regarding the Remediation; (2) Sellers will coordinate the schedule of the Remediation with Buyer so that disruptions of operation of the affected facilities will be minimized; (3) Buyer will cooperate with Sellers to enable them to conduct the Remediation in a reasonably timely manner, including without limitation affording Sellers and their agents reasonable access to the property to be remediated, provided that such cooperation need not include the payment of money or any other financial accommodation; (4) in case clause (ii) of this subsection (f) is applicable, Sellers will obtain the prior written approval of the Buyer, which consent will not be withheld unreasonably, for any consultant or contract or retained by Sellers to design or implement the Remediation; (5) Sellers will conduct the Remediation in compliance with all applicable Environmental Laws; (6) Sellers will use their reasonable efforts to complete such Remediation in a timely and professional manner; (7) in case clause (ii) of this subsection (f) is applicable, Sellers will not agree to or select any Remediation plan without the consent of Buyer to such plan, which shall not be withheld unreasonably or delayed; (8) Sellers will not agree to or select any Remediation plan that imposes any additional obligations on Buyer, including the obligation to sign manifests or obtain permits, without the prior written consent of the Buyer. If Buyer agrees in writing to a Remediation that imposes additional obligations on Buyer, and Sellers then fail, in the reasonable opinion of Buyer after notice from Buyer, to implement the Remediation in a manner which will complete the Remediation in a reasonably timely manner and in accordance with Environmental Laws, the Buyer may give written notice of such failure to the Sellers and, if after giving such notice, Sellers shall not have addressed Buyer's concerns in a satisfactory manner within thirty (30) days, Buyer may assume control of the Remediation and implement and complete such Remediation at the expense of the Sellers (subject to the ultimate determination under this Article IX of responsibility for such expenses). Sellers shall provide the Buyer copies of any study, plan or report associated with the Remediation at least thirty (30) days before it is submitted to any governmental body and shall provide Buyer copies of all reports, plans and correspondence submitted to a governmental body. In addition, Sellers shall provide Buyer seven days' notice (or shall provide Buyer notice as soon as practical if seven days' notice is not practical) of any meetings with, hearings before or other sessions with any governmental body with respect to the Remediation; and (9) Sellers shall be responsible for any violation or alleged violation of Environmental Law, and any loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused), by (i) negligent acts or omissions by the 62 Sellers in connection with Remediation conducted by Sellers at any of the Purchased Assets; (ii) acts or omissions by the Sellers at any of the Purchased Assets in connection with Remediation conducted by Sellers which cause a condition not in violation of Environmental Law or not in need of remediation under Environmental Law to be in violation of Environmental Law or in need of remediation under Environmental Law (including, without limitation, the Release or destabilization of Hazardous Substances which are in a stable or contained state and are in compliance with all applicable Environmental Laws) in connection with Remediation conducted by Sellers; or (iii) negligent acts or omissions by the Sellers in connection with Remediation conducted by Sellers at any of the Purchased Assets that exacerbate or aggravate any condition in violation of Environmental Law or in need of remediation under Environmental Law, to the extent of any such negligent exacerbation or aggravation; provided, that the mere discovery or failure to discover in connection with Remediation conducted by Sellers by the Sellers of a violation of Environmental Law or a condition in need of remediation under Environmental Law shall not in and of itself subject Sellers to liability under this subsection (9). Buyer acknowledges that BHE has requested that the MDEP review the Milford Project pursuant to the Voluntary Response Action Program ("VRAP"), 38 M.R.S.A. (S)343-E and agrees that BHE shall have the right to continue to prosecute such VRAP application after the Closing. BHE agrees to indemnify and hold harmless Buyer from any costs, expenses or liabilities which may arise from the completion of the VRAP process. ARTICLE X TERMINATION ----------- 10.1 Termination. (a) This Agreement may be terminated at any time prior ----------- to the Closing Date by mutual written consent of the Sellers and the Buyer. (b) This Agreement may be terminated by the Sellers or the Buyer if the Closing contemplated hereby shall not have occurred on or before the date twelve months after the date of this Agreement (the date the Sellers or the Buyer becomes entitled to terminate this Agreement pursuant to this Section 10.1(b) is referred to as the "Termination Date"); provided that the right to -------- terminate this Agreement under this Section 10.1(b) shall not be available to any party whose failure to fulfill any obligations under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date; and provided, further, that if on the date twelve months after this -------- ------- Agreement the conditions to the Closing set forth in Section 8.1(c) shall not have been fulfilled but all other conditions to the Closing shall be fulfilled or shall be capable of being fulfilled, then the date referred to above shall be the date which is eighteen months from the date of this Agreement. (c) This Agreement may be terminated by either the Sellers or the Buyer if (i) any governmental or regulatory body, the consent of which is a condition to the obligations of the Sellers and the Buyer to consummate the Closing shall have determined not to grant its or their consent and all appeals of such determination shall have been taken and have been unsuccessful, (ii) one or more courts of competent jurisdiction in the United States or any state 63 shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappealable or (iii) any statute, rule or regulation shall have been enacted by any state or Federal government or governmental agency in the United States which prohibits the consummation of the Closing. (d) This Agreement may be terminated by the Buyer in accordance with Section 3.5 or Section 7.10. 10.2 Procedure and Effect of Termination. In the event of termination of ----------------------------------- this Agreement and abandonment of the transactions contemplated hereby by either or both of the parties pursuant to Section 10.1, written notice thereof shall forthwith be given by the terminating party to the other party and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated as provided herein: (a) none of the parties hereto nor any of their respective trustees, directors, officers or Affiliates, as the case may be, shall have any liability or further obligation to the other party or any of their respective trustees, directors, officers or Affiliates, as the case may be, pursuant to this Agreement, except in each case as stated in this Section 10.2 and in Sections 7.2(b), 7.3 and 7.11; and (b) all filings, applications and other submissions made pursuant to this Agreement, to the extent practicable, shall be withdrawn from the agency or other person to which they were made. Notwithstanding any other term or provision of this Agreement or the other documents delivered pursuant to this Agreement, each of the parties hereby agrees that no officers, directors, employees, agents or attorneys of such party shall be liable hereunder for any profit, loss of capital, consequential, special, indirect, punitive or incidental damages that may be incurred by any other party as a result of any action or inaction by any other party hereunder or in connection with this Agreement or any agreement contemplated to be executed in connection with this agreement, and hereby knowingly, voluntarily and intentionally waives the right to seek any such damages. ARTICLE XI MISCELLANEOUS PROVISIONS ------------------------ 11.1 Amendment and Modification. Subject to applicable law, this -------------------------- Agreement may be amended, modified or supplemented only by written agreement of the Sellers and the Buyer. 11.2 Waiver of Compliance; Consents. Except as otherwise provided in this ------------------------------ Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon 64 strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. 11.3 No Survival. Subject to the provisions of Section 10.2, (i) each and ----------- every representation and warranty contained in this Agreement shall expire with, and be terminated and extinguished by, the consummation of the sale of the Purchased Assets and the transfer of the Assumed Liabilities pursuant to this Agreement and such representations and warranties shall not survive the Closing Date, except to the extent necessary to make effective a party's ability to make an indemnity claim with respect to such representations and warranties during the notice period and as otherwise provided in Section 9.1 and (ii) every covenant and obligation contained in this Agreement shall survive the Closing and the consummation of the sale of the Purchased Assets and the transfer of the Assumed Liabilities, except to the extent a party's ability to make an indemnity claim with respect to such covenants and obligations is expressly limited under Section 9.1. None of the Sellers, the Buyer or any officer, director, trustee or Affiliate of any of them shall be under any liability whatsoever with respect to any such representation, warranty or covenant upon and after the termination or expiration thereof. 11.4 Notices. All notices and other communications hereunder shall be in ------- writing and shall be deemed given if delivered personally or by facsimile transmission, telexed or mailed by overnight courier or registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective -------- only upon receipt thereof): If to the Sellers, to: Bangor Hydro-Electric Company 33 State Street Bangor, ME 04401 Attention: President with a copy to: Winthrop, Stimson, Putnam & Roberts One Battery Park Plaza New York, NY 10004-1490 Attention: David P. Falck If to the Buyer, to: PP&L Global, Inc. 11350 Random Hills Road, Suite 400 Fairfax, Virginia 22030 Attention: Chief Counsel 65 with a copy to: LeBoeuf, Lamb, Greene & MacRae 125 West 55th Street New York, New York 10019-5389 Attention: Jeffrey Meyers 11.5 Assignment. This Agreement and all of the provisions hereof shall be ---------- binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto, including by operation of law, without the prior written consent of the other party, nor is this Agreement intended to confer upon any other Person except the parties hereto any rights or remedies hereunder; provided, however, that the Buyer may assign, with the Sellers' consent, which shall not be unreasonably withheld, any or all of its rights, interests and obligations hereunder to one or more of its Affiliates or, without any consent by Sellers, to one or more of the direct or indirect wholly-owned Subsidiaries of PP&L Global, Inc. (in either which case the Buyer shall nonetheless remain jointly and severally responsible for the performance of all such obligations) so long as any such assignment does not adversely affect the availability or timing of any Federal, state or local government consent or approval required for the consummation of the sale of the Purchased Assets and so long as the Parent's obligations under the Equity Contribution Agreement extend directly to such Affiliate or wholly-owned subsidiary. Notwithstanding the foregoing, the rights and obligations of the Sellers (or any of them) pursuant to this Agreement may, with the Buyer's consent, which shall not be unreasonably withheld, delayed or conditioned, be assigned to, and assumed by, such entity or entities to which any or all of the Sellers or the Purchased Assets have been transferred subsequent to the date of this Agreement pursuant to any corporate reorganization, restructuring or similar transaction. 11.6 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Maine (regardless of the laws that might otherwise govern under applicable Maine principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies. Any and all disputes arising out of or in connection with this Agreement shall be adjudicated in the Federal or state courts located in the State of Maine, to whose jurisdiction the parties hereby irrevocably submit for such purposes. The parties agree to perform their duties pursuant to this Agreement and the Ancillary Agreements in good faith and in a commercially reasonable manner. 11.7 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.8 Interpretation. The Article and Section headings contained in this -------------- Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. Neither party shall be deemed to have been the drafter of this Agreement, which is the product of detailed, arm's length negotiations between the parties and their respective counsel. 66 11.9 Schedules and Exhibits. All Exhibits and Schedules referred to ---------------------- herein are intended to be and hereby are specifically made a part of this Agreement. Any matters described or referred to in any Schedule shall be deemed included in any other relevant Schedule, irrespective of whether any express incorporation by reference is made therein to the extent it is readily apparent that the matter to be disclosed should be included in the other schedule. 11.10 Entire Agreement. This Agreement including the Exhibits, Schedules, ---------------- documents, certificates and instruments referred to herein, embodies the entire agreement and understanding of the parties hereto in respect of the transactions contemplated by this Agreement and supersedes any and all prior oral or written expressions, understandings or agreements between or among the parties with respect thereto. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or therein. It is expressly acknowledged and agreed that, other than as expressly set forth in this Agreement, there are no restrictions, promises, representations, warranties, covenants or undertakings contained in any material made available to the Buyer pursuant to the terms of Section 7.11 (including without limitation the Offering Memorandum, dated April 1998, the reference manuals relating to the Purchased Assets, any other supplemental information or responses to data requests, or materials received from or reviewed at the Sellers' document center, in each case made available to the Buyer by the Sellers or Reed Consulting Group, Inc.). 11.11 No Punitive or Consequential Damages. Notwithstanding anything to ------------------------------------ the contrary contained in this Agreement in Article IX or otherwise, except to the extent provided in Section 9.1(a) or (b) with respect to Indemnifiable Losses consisting of claims of third parties, no party or its Affiliates shall seek or be liable for any punitive or consequential damages, including, but not limited to, loss of revenue or income, or loss of business reputation or opportunity relating to any breach or alleged breach of this Agreement. 11.12 Parties' Knowledge of Others' Breach. Buyer shall not be entitled ------------------------------------ to assert that the condition to Buyer's obligation set forth in Section 8.2(b)(i) of this Agreement is not satisfied due to a breach by Sellers of any of their representation and warranties of which Buyer solely has Knowledge. Sellers shall not be entitled to assert that the condition to Sellers' obligations set forth in Section 8.3(b)(i) of this Agreement is not satisfied due to a breach by Buyer of any of its representation and warranties of which Sellers solely have Knowledge. 67 IN WITNESS WHEREOF, the Sellers and the Buyer have caused this agreement to be signed by their respective duly authorized officers as of the date first above written. BANGOR HYDRO-ELECTRIC COMPANY By: _________________________________ Name: Title: PENOBSCOT HYDRO CO., INC. By: _________________________________ Name: Title: PP&L GLOBAL, INC. By: _________________________________ Name: Title: 68 IN WITNESS WHEREOF, the Sellers and the Buyer have caused this agreement to be signed by their respective duly authorized officers as of the date first above written. BANGOR HYDRO-ELECTRIC COMPANY By: /s/ --------------------------------- Name: Title: PENOBSCOT HYDRO CO., INC. By: /s/ --------------------------------- Name: Title: PP&L GLOBAL, INC. By: /s/ --------------------------------- Name: Title: EX-10.W.2 19 EQUITY CONTRIBUTION AGREEMENT Exhibit 10(q)-2 EQUITY CONTRIBUTION AGREEMENT EQUITY CONTRIBUTION AGREEMENT (this "Agreement") dated as of September 25, 1998 by and among PP&L GLOBAL, INC., a Pennsylvania corporation ("Purchaser"), PP&L RESOURCES, INC., a Pennsylvania corporation ("Parent"), PENOBSCOT HYDRO CO., INC., a Maine corporation ("PHC") and BANGOR HYDRO-ELECTRIC COMPANY, a Maine corporation ("BHE", and together with PHC the "Sellers"). R E C I T A L S WHEREAS, Purchaser and Sellers are parties to that certain Asset Purchase Agreement dated as of September 25, 1998 ("Purchase Agreement"); WHEREAS, Purchaser is directly wholly-owned by Parent; NOW, THEREFORE, in consideration of the premises and as an inducement for Sellers to enter into the Purchase Agreement, the parties hereto agree as follows: Section 1. Definitions. Capitalized terms used herein and not otherwise ----------- defined herein shall have the respective meanings given to them in the Purchase Agreement. Section 2. Equity Contribution. ------------------- (a) Sellers may, in their sole discretion and without the concurrence of Purchaser or any of its Affiliates, give written notice to Parent when all conditions precedent to the obligations of Sellers and Purchaser to consummate the Closing as set forth in Article VIII of the Purchase Agreement have been satisfied (or waived by the party entitled to waive such a condition). Parent hereby irrevocably promises and agrees that, upon receipt of such notice, Parent will make or cause to be made within five business days a contribution in immediately available funds to Purchaser in the amount of the Initial Payment. (b) If the Purchaser breaches its obligations to effect the Closing as and when required by the Purchase Agreement, and, if as a result thereof, Purchaser is the subject of a final and binding order of a court (or other tribunal having jurisdiction) obligating it to pay any damages, costs, and expenses incurred by Sellers, other than certain damages as contemplated in Section 11.11 of the Purchase Agreement (a "Liability"), Sellers may, in their sole discretion and without the concurrence of Purchaser or any of its Affiliates, give written notice to Parent that such Liability was incurred. Parent irrevocably promises and agrees that it shall make or cause to be made a contribution in immediately available funds to Purchaser within five business days after receipt of such notice in an amount sufficient for Purchaser to fully satisfy and discharge the Liability up to but not to exceed the amount of the Initial Payment. (c) If a court (or other tribunal having jurisdiction) enters a final and binding order to the effect that Sellers were not entitled to give any notice provided for in subsection (a) or (b) hereof, then Sellers shall be liable to pay Parent, as liquidated damages and in full satisfaction of any claim of Purchaser or any of its Affiliates arising out of such order insofar as such order relates to Sellers' giving of such notice, an amount equal to the documented out-of-pocket costs of Parent (including, without limitation, Parent's cost of capital after giving effect to related income taxes) incurred in connection with Parent's contribution to Purchaser as a result of such wrongful notice by Sellers. (d) Notwithstanding any other provision of this Agreement to the contrary, Parent shall have no obligation to make any contribution to Purchaser under this Agreement to the extent its aggregate contributions to Purchaser made as a result of a notice given by Sellers hereunder or otherwise contributed (provided such funds have been segregated in accordance with Section 4 hereunder) equal or exceed the amount of the Initial Payment. (e) Any payments made by Parent directly to Sellers in satisfaction of Parent's obligations to make a contribution to Purchaser hereunder shall be deemed to be on behalf of, and to satisfy the obligations of, Purchaser to Sellers under the Purchase Agreement (to the extent of the amount paid by Parent). (f) If, prior to receipt of a notice from Sellers requesting a contribution to Purchaser, Parent makes a contribution to Purchaser as contemplated herein, it shall promptly notify Sellers in writing of such contribution, which notice shall state that such contribution has been segregated as provided in Section 4 herein. (g) Upon written request of Sellers given to Purchaser at any time after Parent has made a contribution to Purchaser contemplated herein, Purchaser agrees to return such contribution to Parent. Section 3. Representations and Warranties. ------------------------------ (a) Parent and Purchaser represent and warrant to Sellers as follows: (i) Each of Parent and Purchaser is a corporation, duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania, and has full corporate power and authority to enter into this Agreement and to perform its obligations hereunder. (ii) The execution and delivery by each of Parent and Purchaser of this Agreement, and the performance of its obligations hereunder, have been duly authorized by all necessary corporate action on the part of Parent and Purchaser, as the case may be. (iii) Each of Parent and Purchaser has duly executed and delivered this Agreement. Assuming due authorization, execution and delivery of this Agreement by Sellers, this Agreement constitutes the valid and binding obligation of each of Parent and Purchaser, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights and the application of general principles of equity. (iv) All consents, authorizations and other approvals of any governmental authority which are necessary for the execution and delivery by each of Parent and Purchaser of this Agreement and the performance by it of its obligations hereunder have been obtained and are in full force and effect, are final and not subject to any appeal. (v) Execution, delivery and performance by Parent of this Agreement will not conflict with or result in a violation or default under any contract, agreement or order of any court or regulatory authority binding upon Parent or any of its Affiliates. (b) Sellers represent and warrant to Parent as follows: (i) Sellers are corporations, duly organized, validly existing and in good standing under the laws of the State of Maine, and have full corporate power and authority to enter into this Agreement and to perform their obligations hereunder. (ii) The execution and delivery by Sellers of this Agreement, and the performance of their obligations hereunder, have been duly authorized by all necessary corporate action on the part of Sellers. (iii) Sellers have duly executed and delivered this Agreement. Assuming due authorization, execution and delivery of this Agreement by Purchaser and Parent, this Agreement constitutes the valid and binding obligation of Sellers, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights and the application of general principles of equity. (iv) All consents, authorizations and other approvals of any governmental authority which are necessary for the execution and delivery of Sellers of this Agreement and the performance by them of their obligations hereunder have been obtained and are in full force and effect, are final and not subject to any appeal. (v) Execution, delivery and performance by Sellers of this Agreement will not conflict with or result in a violation or default under any contract, agreement or order of any court or regulatory authority binding upon Sellers or any of their Affiliates. Section 4. Restriction on Use. Purchaser shall segregate from its general ------------------ funds any contributions made by Parent hereunder and shall use such funds for the purpose, and only for the purpose, of satisfying its obligations to Sellers under the Purchase Agreement. Such contribution shall be placed in a segregated account at an independent financial institution, the name of which account makes reference to the restrictions contained herein. Section 5. Termination. The obligation of Parent under this Agreement ----------- shall terminate upon the earliest to occur of: (a) contribution by Parent to Purchaser of an amount equal to or exceeding the amount of the Initial Payment in response to a notice given by Sellers hereunder or otherwise contributed (provided such funds have been segregated in accordance with Section 4 and any necessary notice has been given pursuant to Section 2(f)); (b) five business days after notice of termination of the Purchase Agreement is given pursuant to Article X thereof, unless prior to the close of business on the fifth business day after such notice Parent receives written notice from Purchaser or Sellers that either of them in good faith believes that the Purchase Agreement is still in full force and effect or has been improperly terminated, and that Sellers are actively pursuing a Liability claim, in which case this Agreement shall terminate upon the settlement or other determination of such claim in accordance with Section 2(b) hereof and the making of the required contribution by Parent; or (c) the occurrence of the Closing under the Purchase Agreement. Section 6. Miscellaneous. ------------- (a) This Agreement shall be binding upon, shall inure to the benefit of, and shall be enforceable by, the parties hereto and their respective successors and permitted assigns. In the event that Purchaser assigns its rights under the Purchase Agreement to a special purpose corporation, then the term "Purchaser" herein shall refer to such special purpose corporation, and Parent shall make its required contribution hereunder directly to such special purpose corporation. Sellers shall be entitled to enforce the obligations of Parent hereunder without the concurrence of Purchaser and regardless of any claims by Purchaser against Sellers, including any claims under, or the satisfaction or non-satisfaction of any obligations of Seller under, the Purchase Agreement. Neither this Agreement nor any right hereunder may be assigned by any party without the prior written consent of the other parties hereto, which consent (except in the case of a transfer by Parent of its obligations hereunder) shall not be unreasonably withheld. (b) This Agreement contains the entire understanding of the parties with respect to the matters herein and supersedes all prior agreements and understandings between the parties with respect to the subject matter hereof. (c) All notices and other communications required or permitted by this Agreement or by law to be served upon or given to a party hereto by any other party hereto shall be addressed as provided in the Purchase Agreement. (d) This Agreement may not be amended or otherwise modified except by a written agreement signed by each party hereto. (e) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF MAINE, EXCLUDING ITS CONFLICTS OF LAWS PROVISIONS. (f) If any provision of this Agreement shall be determined to be unenforceable, void or otherwise contrary to law, such provision shall in no manner operate to render any other provision of the Agreement unenforceable, invalid or contrary to law, and this Agreement shall continue to be operative and enforceable in accordance with the remaining terms and provisions hereof. (g) The terms, conditions, covenants, representations and warranties hereof may be waived only by a written instrument executed by the party waiving compliance. The failure of a party at any time or from time to time to require performance of any provisions hereof shall in no manner affect its rights at a later time to enforce the same. No waiver by a party of any condition or any breach of any term, covenant, representation or warranty contained in this Agreement in any one or more instances shall be deemed to be, or be construed as, a further or continuing waiver of any such condition or breach of any other term, covenant, representation or warranty. (h) No person other than the parties hereto, or their successors or permitted assigns shall have any rights hereunder. (i) This Agreement may be signed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PURCHASER: PP&L GLOBAL, INC. By:________________________________ Name: Its: PARENT: PP&L RESOURCES, INC. By:________________________________ Name: Its: SELLERS: PENOBSCOT HYDRO CO., INC. By:________________________________ Name: Its: BANGOR HYDRO-ELECTRIC COMPANY By:________________________________ Name: Its: EX-12.(A) 20 PP&L RESOURCE AND SUBSIDIARIES COMPUTATION OF Exhibit 12(A) PP&L RESOURCES, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Millions of Dollars)
1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Fixed charges, as defined: Interest on long-term debt...................... $203 $196 $207 $213 $214 Interest on short-term debt and other interest........................... 33 26 17 18 18 Amortization of debt discount, expense and premium - net............................. 2 2 2 2 2 Interest on capital lease obligations Charged to expense.......................... 8 9 13 15 12 Capitalized................................. 2 2 2 2 1 Estimated interest component of operating rentals............................. 18 15 8 8 6 Proportionate share of fixed charges of 50-percent-or-less-owned persons....................................... 1 1 1 1 1 ------ ------- ------- ------- ------- Total fixed charges..................... $267 $251 $250 $259 $254 ====== ======= ======= ======= ======= Earnings, as defined: Net income (a).................................. $379 $296 $329 $323 $216 Preferred and Preference Stock Dividend Requirements.................................. 25 24 28 28 28 Less undistributed income of less than 50-percent-owned persons................. - - - - - ------ ------- ------- ------- ------- 404 320 357 351 244 Add (Deduct): Income taxes.................................... 259 238 253 286 180 Amortization of capitalized interest on capital leases............................ 2 2 4 5 9 Total fixed charges as above (excluding capitalized interest on capital lease obligations)................. 265 248 248 257 253 ------ ------- ------- ------- ------- Total earnings.......................... $930 $808 $862 $899 $686 ====== ======= ======= ======= ======= Ratio of earnings to fixed charges......................................... 3.48 3.22 3.45 3.47 2.70 ====== ======= ======= ======= =======
(a) 1998 net income excluding extraordinary items. EX-23 21 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (No. 333-70101 and No. 333-48781) of PP&L Resources, Inc. and in the Registration Statements on Form S-8 (No. 33-50031 and No. 333-02003) of PP&L Resources, Inc. of our report dated February 1, 1999 appearing on page 50 of this Form 10-K. PRICEWATERHOUSECOOPERS LLP Philadelphia, Pennsylvania March 3, 1999 EX-24 22 POWER OF ATTORNEY EXHIBIT 24 RESOURCES, INC. PP&L, INC. 1998 ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K POWER OF ATTORNEY ----------------- The undersigned directors of PP&L Resources, Inc. and PP&L, Inc., both Pennsylvania corporations, which are to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, their 1998 Annual Report on Form 10-K, do hereby appoint William F. Hecht, John R. Biggar and Robert J. Grey their true and lawful attorney, and each of them their true and lawful attorney, with power to act without the other and with full power of substitution and resubstitution, to execute for them and in their names said Form 10-K Report and any and all amendments thereto, whether said amendments add to, delete from or otherwise alter said Form 10-K Report, or add or withdraw any exhibits or schedules to be filed therewith and any and all instruments in connection therewith. The undersigned hereby grant to said attorneys and each of them full power and authority to do and perform in the name of and on behalf of the undersigned, and in any and all capacities, any act and thing whatsoever required or necessary to be done in and about the premises, as fully and to all intents and purposes as the undersigned might do, hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals this 26th day of February, 1999. /s/ Frederick M. Bernthal L.S. /s/ Stuart Heydt L.S. - ------------------------------ ---------------------------- Frederick M. Bernthal Stuart Heydt /s/ E. Allen Deaver L.S. /s/ Frank A. Long L.S. - ----------------------------- ---------------------------- E. Allen Deaver Frank A. Long /s/ William J. Flood L.S. /s/ Norman Robertson L.S. - ------------------------------ ---------------------------- William J. Flood Norman Robertson /s/ Elmer D. Gates L.S. /s/ Marilyn Ware L.S. - ------------------------------ ---------------------------- Elmer D. Gates Marilyn Ware /s/ William F. Hecht L.S. - ------------------------------ William F. Hecht EX-27 23 PP&L RESOURCES, INC. FINANCIAL DATE SCHEDULE
UT 0000922224 PP&L RESOURCES, INC. 1,000,000 YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 4,457 929 948 3,273 0 9,607 2 1,416 372 1,790 47 50 3,233 3 0 633 1 0 109 59 3,682 9,607 3,786 259 2,959 3,218 568 66 634 230 (544) 25 (569) 222 188 637 (3.46) (3.46) NET OF $419 MILLION OF TREASURY STOCK NET INCOME INCLUDES AN EXTRAORDINARY ITEM OF ($948) MILLION ($1,614 MILLION NET OF $666 MILLION OF INCOME TAXES) REFLECTING THE EFFECTS OF A PENNSYLVANIA PUBLIC UTILITY COMMISION RESTRUCTURING ORDER AND DEREGULATION PP&L'S ELECTRIC GENERATON OPERATIONS.
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